You may be asking, “What is a trust?” A trust is a legal document that protects your assets to ensure they are distributed according to your wishes after you die. Trusts typically fall into one of two categories: revocable and irrevocable with most people believing a revocable trust can be changed while an irrevocable trust cannot. More importantly, a revocable trust will die when you die while an irrevocable trust will live on after you die. So, If you want your assets to go to someone after you die you need an irrevocable trust, a trust that will outlive you.
I know what you’re thinking. “I have a will. I don’t need a trust.” Be careful. A trust is a legal document with a trustee who has a legal responsibility to carry out your last wishes and is held accountable to that responsibility. A will on the other hand, though a legal document, has limitations and is contestable. So, if your will says everything goes to Jimmy when you die and Billy goes before a probate judge and says, “Listen judge, that’s really not what Mom wanted. We talked often and it was her wish that me and my brother split everything 50/50.” The judge will have the final decision and if Billy can sway him to see things his way, the instructions in your will are useless.
I know you have the best kids in the world and they would never fight over money. Guess what? Sometimes, money makes good people do bad things. So why tempt them when a trust not only carries out your last wishes but can protect and preserve your assets from creditors?
Creditors? What would happen if you ran over someone with your car tomorrow on the way home from the grocery? Well, I can promise you two things: first, they will sue you and second, they will win. It’s unfortunate, but these are the times that we live in. Hopefully, you have car insurance and maybe even a $1 million umbrella policy. What happens if you run over a grad student who has a promising 40-year career as a brain surgeon? Chances are that the $1 million umbrella policy will fall short, which means the claim may be attached to personal property like your home, IRAs, investment accounts, certificates of deposit as well as checking and savings accounts at the bank. If you don’t believe me, ask around. It’s true. Assets held by an irrevocable trust are protected from all creditors. An attorney once described it to me like this; your assets are inside a vault with the door locked and two armed guards standing outside the door. Now that’s safe!
Let me be honest. The probability of his happening to you is less than 2/100s of a percent. While that may make you feel better, there is an event equally as devastating that will happen to 70% of consumers age 65 or older. Seven out of ten of you will need some form of extended care before you pass away. I’m guessing some of you may have Long Term Care Insurance. Hooray! You have a plan which is more than most people can say but is LTC insurance enough?
Depending upon where you live, a private room in a U.S.-based nursing home is going to cost you on average $110,000/ year in 2023. With men spending an average of 2.5 years and ladies spending an average 3.5 years in nursing homes, you could need $275,000-$385,000 ($300/day). That’s not my estimate. Genworth Financial does a study every year for my industry and this is what they found in their 2021 research. Do you have a Long-Term Care Policy that pays $300/day? Most policies available today have daily benefits ranging from $100-$200 per day.
Let’s say your LTC policy will cover half of the cost. Who pays the other half? Did I hear you say Medicare? If you are 65 years old, enrolled in Medicare, spend 3 midnights in a hospital, are certified that you need post-op care to get better and you go straight to a nursing home they will cover 20 days at 100%. On the 21st day, you pay $204/day beginning in 2024 and they pay the rest. On day 101, your Medicare claim is closed. No more benefits are paid. If you have no LTC insurance or even if you do, chances are you will have no choice but to self-pay for your care.
Do you have any other options? You’ve worked all your life, saved, sacrificed, and invested to leave something to your children. You never dreamed that you would have to spend $110,000 per year to take care of yourself or your spouse in old age. What about Medicaid? Will they pay for your care? Absolutely, but only once a married couple has spent down their assets to $156,140. Yes, the healthy spouse can keep the house but Medicaid will place a lien on that home for the medical bills they pay for the sick spouse in the nursing home. Once the healthy spouse dies, the home is sold and Medicaid is reimbursed first. By the way, if you are single you get to keep $2,000. That’s it. Since you now live in a nursing home, your home must be sold and the proceeds must be used for your care. For the record, I don’t think you really want the Medicaid bed in the nursing home.
So you think you’ve got this all figured out? Rather than “spend down” your assets, you’re going to give everything away while you’re healthy. Not too fast. To begin with, there is a 5-year look back. Anything you give away during the 5 years immediately preceding your application will count as if you had never given it away and your application will be denied. There are tax implications and creditor concerns with this strategy as well.
So how do 70% of you prepare for an event that could wipe you out financially? You embrace opportunities like an Asset Preservation Trust. This trust is irrevocable but allows you indirect access to your assets thanks to a law change back in 2013. If you need or want access to the assets in your trust you work through your trustee (adult child, friend, attorney, etc.). The Asset Preservation Trust also has its own Tax ID Number. As such, the assets are no longer tied to your social security number, protecting them from Medicaid or any other personal creditor. You can place every asset you own in an APT. Once 5-years have passed, Medicaid cannot force you to spend any of those assets for your care. P.S. There are other Medicaid-approved strategies available if you find yourself in need of care during the 5-year look-back.
You might be thinking Medicaid is for old, poor people. It’s not for me. Need I remind you how Medicaid is funded? That program is funded through payroll taxes. You have paid for this benefit. Why would you ignore it? Besides, if you live long enough Medicaid will take care of you anyway (after you’ve spent all of your money). So why would you spend down what you have worked so hard to save when there is an opportunity to preserve and protect it?
Don’t let a strategy that may be new to you cause you to miss out on an opportunity to preserve and protect your assets. For more information on Asset Preservation Trusts call 304.840.0706 for an attorney referral today. JondaKnows is not an attorney. As such, we do not offer legal advice.