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I frequently receive questions from clients and advisors regarding what, if anything, can be done to plan for the long-term care needs of a client and/or a spouse/family member. In fact, there are several things a client can do to plan for long-term care costs that may be incurred as one ages. For example, those who have amassed sufficient wealth can self-insure and, for those individuals fortunate enough to be in that position, the advisor plays a crucial role in how that wealth is to be invested, with the goal of covering the client’s long-term care clearly delineated.
But for the large majority of clients for whom self-insuring is not an option, what are the alternatives?
The first alternative, one we elder-law attorneys regularly counsel our clients to consider, is long-term care insurance. This is a good option for those who cannot self-insure, plus hybrid policies represent a major step forward when compared to the traditional policies sold over the last three decades. Yet, long-term care insurance can have limitations. These policies remain underwritten, thus pre-existing medical conditions can mean that some people won’t qualify. And, the cost of a policy, depending on the extent of coverage desired, the length of time the policy will pay benefits, the length of the elimination period, or whether there will be a waiver of premium, just to name a few options, can be steep.
If a person cannot qualify or the cost is too high, what can a client do?
In such cases, a client can establish an irrevocable trust, which, if funded at least five years prior to the need for Medicaid, can render the assets inside the trust non-countable for Medicaid purposes. This can go a long way toward assisting a client in meeting the $2,000 resource limitation on assets needed to qualify for Medicaid in most states.
In order to set up an irrevocable trust, a client must give up control of the assets placed into the trust. If he or she does not give up control, then the assets in the trust will be countable for Medicaid purposes. In fact, this is exactly how assets in a revocable trust are treated for Medicaid purposes – they are fully countable. And, although a person can choose to retain the right to receive income from an irrevocable trust, doing so will result in this income being counted when the person applies for Medicaid, and that income will have to be used toward the cost of care. Yet, the option to receive income is an important one for some clients who rely on the income generated on trust assets to meet monthly expenses during and after the five-year, look-back period.
Adult children are usually named as trustees and principal and/or income beneficiaries of an irrevocable trust, but advisors should be aware that children should only be named in these capacities if certain conditions exist. For example, a child who is not financially secure, or who is in a bad marriage, or who suffers from alcoholism or mental illness, would not be a suitable choice to serve either as trustee or lifetime beneficiary of the trust.
There are also tax advantages to setting up an irrevocable trust. The trust can be set up as a grantor trust under the tax code so as to allow the income generated on trust assets to be taxed at the parent’s lower tax rates, rather than the children’s or trust’s higher tax rates. And, the trust can be drafted to preserve a step-up in basis of appreciated assets, as well as the Internal Revenue Code Section 121 exclusion from capital gains on the sale of one’s principal residence (currently $250,000 for individuals and $500,000 for married couples).
While there are many complexities in setting up an irrevocable trust to preserve assets in the face of long-term care costs, these are some of the questions you, the advisor, need to be asking. Your client is unlikely to initiate these discussions with you. Yet you will need to make some important decisions regarding the management of your client’s financial resources down the road should the need for long-term care arise. The best time to set up an irrevocable trust is when your client is healthy and before any medical conditions are diagnosed.
Howard S. Krooks is an elder law and special needs planning attorney practicing in New York and Florida.
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