Mon, 27 July 2009
In discussing long term care planning with new clients, very often they will tell me that they have everything covered because years earlier they set up a living trust. Living trusts are estate planning devices designed to eliminate the need to probate an individual’s estate at his/her death. In the 1990’s they were especially popular and still are very common, especially in states such as Florida and New York, where probate is time consuming and expensive. But are they useful for long term care planning purposes?
Most likely, not. Living trusts are usually revocable, meaning that when a grantor or settlor (the person establishing the trust) transfers assets to it he/she has the ability to take the assets back out at any point in time. People believe that when they make transfers to the trust, these assets are not counted as theirs for purposes of qualifying for Medicaid or VA Aid and Attendance benefits. That is just plain wrong. If the trust gives you the ability to take the asset back out of the trust, the government will say “go ahead and take it back, spend it all down and then when it is gone come back to us.” The trust has to be irrevocable, meaning assets transferred to the trust cannot be taken back out by the grantor.
A second reason living trusts (or other trusts, such as testamentary credit shelter or bypass trusts, won’t work for long term care planning purposes is that they usually contain a clause providing that the trustee can use the assets for the “health support and maintenance” of the beneficiary. Again, if the beneficiary needs long term care the government will look at the trust and point to that language. “Long term care needs are health, support and maintenance,” they’ll say, “so spend it down and then come back to us when it’s gone.”
So, what’s the solution? If you have read previous posts on this blog you know that first of all, the trust must be irrevocable. Now, that makes people uncomfortable. “Does that mean I am giving away my assets and losing control over them?” The answer of course, is no. What I tell people is that the purpose of this transfer is not to give away assets because you may very well need some (or all) of them, depending on what your health needs are. But you can qualify for government benefits that can help pay for care. Not knowing how long you will live, the challenge is to protect your assets so you don’t run out of money. Tapping into other sources helps accomplish that goal because you are spending down your own assets less rapidly.
Additionally, the trust language allowing distribution of assets by the trustee to the beneficiary has to be tailored very carefully so as not to jeopardize eligibility for government benefits. It all adds up to a trust that avoids probate and addresses long term care planning needs.
Category:Long term care planning -- posted at: 6:00am EST