As if the decision in estate planning over whether to create a will or open a trust isn’t confusing enough, I’ve come to understand (on a personal level) that even this may not be sufficient for ensuring your lifelong savings get passed on to your loved ones.
In short: With the way things work now with elder care, there may not be anything left to give!
Here’s my story. Recently, my wife’s grandparents both developed a very bad case of Alzheimer’s, and somewhat rapidly. This has caused the family to make a quick decision to move them from their residence and into the care of a nursing home instead.
Do you have any idea how much a nursing home costs these days? While interviewing a number of various ones, we learned that the average going price is approximately $8,000 per person per month! Yes, that’s right – $16,000 per month out of pocket for the two of them. That’s $192,000 per year! According to the website A Place for Mom, that’s not that far off from the national average.
So how does anyone ever afford a nursing home? Apparently most don’t. A lot of elderly people will apply for Medicaid which is effectively where taxpayer money is used to make those payments on their behalf.
Like any government program, Medicaid has rules – lots of rules! One of the biggest ones is that you cannot own any more than $2,000 in assets (not including your home) before starting to receive your benefits. In other words, you need to spend literally just about all of your money before the state will help out (hence, they call this process a “spend down”). And at $16,000 per month, that’s not going to take very long at all!
So how do you like that? You work your entire life saving and sacrificing only to have private nursing homes take it all away before government assistance will kick in. In case you’ve ever wondered why you don’t really ever seem to hear about anyone receiving an inheritance any more, I would guess this is probably one of the leading factors why.
As a father who’s thinking about the future of my wife, kids, and family, how can I ensure that the financial legacy I’m building the foundation for right now will make it into the right hands?
The Irrevocable Living Trust
As you might guess, go looking on the Internet and you’re likely to find the answer after a while …
There are plenty of law-oriented websites that talk about how to bypass Medicare spend-down using something called an irrevocable living trust.
Very important! The “revocable” living trust I talked about before and an “irrevocable” living trust are two totally different things. For regular estate planning where you wish to bypass probate, a revocable living trust will accomplish this while still giving you access to your money at all times. This is because you can technically “revoke” it whenever you wish. The same is not true for an irrevocable trust.
As I understand it, here is how one works:
Let’s say you have $1 million dollars. You decide to move this money into an irrevocable trust.
Once you do this, the money is no longer yours. You give up the rights to it. You can never access it again – even in an emergency. It’s basically gone.
BUT: You can still collect on the income gained from the principal amount. So in our $1 million example, let’s say the assets pay an average of 4% in dividends. This means you could still be entitled to receive the income of $40,000 per year to use as you wish.
Isn’t this kinda starting to sound a little bit like an annuity? But here’s where it gets interesting …
While you’re living: Medicaid cannot count this irrevocable trust as part of your assets (since technically you’ve given up the legal rights to it). As long as it wasn’t created within 5 years of your Medicaid application, it basically stands alone untouched.
Medicaid can however collect any income you’re receiving from this trust. In our earlier example, that means the $40,000 would go to them.
When you pass away: The money goes to your beneficiaries just as you wish. Because it’s a trust, it skips the probate process. And because it was an irrevocable trust, Medicaid cannot collect on it to re-coup any money they paid out for your nursing home care.
You’ve done it! You’ve passed on your fortune as you had intended.
A Potential Strategy
But what if I give up the money too soon? How do I know when I will go into a nursing home? I don’t want to cut myself short?
These are all totally valid questions. If I had to think of a good potential strategy for how all of this could fall in line, it would be like this:
- You retire in your 50’s (thanks to everything you’ve learned while reading MyMoneyDesign no less!). Example: Your nest egg = $1,000,000. That’s an income of $40,000 using the 4 Percent Rule.
- You enjoy your 50’s, 60’s, and 70’s. Perhaps by now your nest egg has grown to $2,000,000. (maybe more?).
- Now you’re in your 70’s. You realize looking at your family history and medical statistics that significant health issues could start to develop from this point on, and so you decide the irrevocable living trust may be the way to go. You’re living comfortably off of your nest egg, and you decide to take half of your $2 million dollars and put $1 million of it into the trust. Even though you’re technically “giving this money up”, you can still get whatever interest or dividends come from it. Therefore, from an income perspective, you’ve lost nothing! You can still enjoy that same $40,000. And from an “emergency” standpoint, you’ve still got $1 million in the bank.
- Now in the event of your passing, your heirs will inherit this $1 million that you’ve so carefully earmarked aside. Mission accomplished!
Remember: I would only suggest considering this approach for someone who has ample time to clear the 5 year rule AND who has more than enough nest egg built up. The last thing you want to do is hurt yourself in the process by UN-qualifying yourself for any government assistance.
Readers: What have your experiences been with elderly grandparents and parents in terms of their finances? What steps did you take to protect their finances?
Featured image courtesy of Flickr
ARB says
Great strategy! I never knew that about irrevocable trusts (I always thought they were court mandated results of a marital dispute and the like). If you pair this with a wealth/asset transfer solution, you’ll guarantee that your loved ones are well taken care off.
Another thing I would urge everyone to do when they hit middle age: Buy Long Term Care insurance.
So many people think these nursing home stays are covered by their health insurance. They are not. Health insurance covers your hospital visit, not your remaining years in assisted living. LTC insurance is a completely separate type of policy that covers nursing homes and the like. But it’s not something you’ll qualify for at age 85. You need to have a couple decades worth of paying premiums, which means that you shod apply for coverage no later than your mid-60s.
Do it if you want to protect your loved ones financially. Or else don’t be mad if they drop you off on the side of the highway and drive off.
Sincerely,
ARB–Angry Retail Banker
MMD says
Thanks for the tip! I’ll definitely have to check out the Long Term Care insurance. Anything to help keep the fortune we’ve worked so hard to build out of the hands of the nursing home and with those we love instead.
Justin Murphy says
Interesting article with good take away info, but with one important omission. What if the the wealthy person in your example does not want to be limited to the care options available through Medicaid? The $1 million put into the Irrevocable Trust could have been used for higher quality nursing home care. Yes, perhaps less left to their heirs, but more options for their own needs.