During an estate planning consultation, clients often have a simple question for us:
“If I end up in a nursing home, I want to make sure my kids get my (house, land, stock, etc.). How can I do that?”
Our short answer is:
“You can do it, but you might not like what you have to do.”
The full answer truly is a long answer to a short question. But it is an important answer to understand, even if it may not be the one everyone would like to hear.
Understanding MA
To understand this answer, the first thing to understand is how MA works. MA (short for Medical Assistance, a/k/a Medicaid and Family Care) is the government program that, in certain cases, pays for long term care.
But MA does not pay automatically. Rather, generally speaking long term care is a private transaction like any other, and people who need out of home care choose a facility and pay the facility directly without involving the government at all.
For people who are eligible, the government will pay for care under the MA program. However, to be eligible, a single person has to be essentially out of assets. (This is simplifying a bit, but the details are not important for this discussion.) One spouse in a married couple will be eligible if the couple’s assets fit within rules designed to allow the other spouse to continue to be able to support themselves in the community. For some perspective here, the community spouse can keep the home, certain retirement assets, a vehicle, and other assets with a value less than an amount determined by a formula (currently between $50,000 and $130,380).
This means the real question is:
“If I end up in a nursing home, I want to make sure I qualify for MA and my kids get my (house, land, stock, etc.). How can I do that?”
A brief history of asset protection
The short answer to the question is to give the asset away. Many, many years ago, if a person needed care, they could give all of their assets to their children, then immediately apply for MA and point out that they had no funds available to pay for their care. The government would dutifully step in and pay.
Eventually, our friends in Washington decided that paying for care in this situation was not a good use of taxpayer money, and added a “lookback period.” This meant that if a person applied for MA, they would have to disclose gifts made prior to the application. That “lookback period” is currently five years. So, a person applying for benefits today must disclose any gifts made in the prior five years. If they made substantial gifts during that five year period, they are not eligible for MA.
This lookback rule has been effective in stopping the easiest (some would say most abusive) strategies available for asset protection planning. Because gifts must be made five years before an application, gifts must now be made well in advance of a care need.
That means the question now is:
“Is giving my (house, land, stock, etc.) to my children now a good idea?”
This is a risk/reward analysis.
family risks in lifetime giving
There is no middle ground between giving and not giving. People sometimes say, “I put my kids’ names on my house.” No, they didn’t. Their kids own their house now. And that has three types of consequences.
First, the children could choose to exercise their rights as owners. We have yet to see a child sell their parents’ house out from under them, but it could happen.
Second (and more likely), the children (or a child) could fall into a situation outside their control. They could run into trouble with creditors, file for bankruptcy, get divorced, or become disabled. In that case, the asset they received from their parents is like any other property they own. It might become subject to a judgment, part of the bankruptcy or divorce, or an asset that must be sold for them to receive disability benefits.
Third, the child could die unexpectedly while the parents (or surviving parent) are still living. In that case, the asset they received is again treated like any other asset they own. It would be part of their estate, pass through probate, be subject to claims of creditors, and perhaps end up transferred to a spouse or other family member.
MA program risks
In addition to family risks, gifting strategies also pose a risk from the structure of the MA program itself.
As a government program, MA is subject to the whims of politicians in terms of its funding level. And unfortunately, politicians over the past decade, through administrations and congresses of both political persuasions, have consistently underfunded the MA program.
Why does this matter? Most care in this country is provided by assisted living facilities. Assisted living facilities do not have to accept MA. As the cost of care has risen to exceed the MA rate, many facilities have stopped taking MA, or have limited the number or kind of MA residents they will take.
Today, in central Wisconsin, there are still many good facilities that accept MA. But there are some very good facilities that do not, or that have taken steps to limit MA residents.
What will this look like in 10, 20, or 30 years? Only time will tell. But many people who pay close attention to this problem believe that absent big changes, we will soon have a system where those who can afford to pay will have choice and good care options, and those who are relying on government assistance do not.
making the right bet
On balance, then, making a lifetime gift is a bet. On one side is the reward—an advance on an inheritance for the giver’s children. On the other side is the risk—the risk of something unexpected happening to the recipient, or the risk of the government providing poor care in the future. That’s not a bet we would tell our parents or grandparents to take, and so we don’t see it as a risk we can advise our clients to take.
That’s why our standard advice is that if our clients want to give away something they don’t need for their retirement (a cabin, inheritance, or just extra money they don’t need and would make their kids’ life better), by all means, they should do it. Just understand that once it’s gone, it’s gone.
But we don’t recommend giving away assets our clients might need for their retirement. For those, our standard advice is to create a good estate plan and allow whatever is not needed to pass to children as intended.
On life estates and irrevocable trusts
This brings us to two more common strategies used to address this problem—life estates and irrevocable trusts. Both are attempts to solve this problem by allowing a parent to give away an asset to their children and still retain some control over it. Both work similarly, but have similar problems.
In a life estate, the parent gives away the property but keeps the right to live in the property during their lifetime. (This right to stay in the property is called a life estate.) This offers more protection than an outright gift, since the parent cannot be removed from the home by the other owners. However, because ownership is divided, the parent cannot unilaterally sell the house or adjust to changes in circumstances, and the statistical value of the life estate is still applied to care provided under the MA program. The interest given away is still owned by the child and is subject to all the same family risks as a transfer of the full value. As a result, a life estate should be thought of similarly as a completed gift of some of the property—and is subject to the same risk/reward discussion.
In an irrevocable trust, rather than giving to the children directly, the parent gives to an irrevocable trust. However, the irrevocable trust must be set up so that the parent cannot ever get the asset back or receive income from it. This can mitigate some of the family risks associated with a direct gift on the margins, since the parent retains authority to change the distribution if a child dies or becomes disabled during the parent’s lifetime, and trust assets are not available to a child’s creditors during the grantor’s lifetime. However, since the parent cannot get the funds back from the trust, this is truly a completed gift, and the parent is still making a bet that the asset will not be needed and that the parent will receive good care from the government if needed.
In addition, irrevocable trusts are expensive, and sometimes sold as a magic bullet without full disclosure of their limitations. The sales pitch—”don’t go broke in a nursing home”—is an appealing one. But in the end, irrevocable trusts are a costly option that still shares most of the same downsides as a direct gift, and should be thought of in the same way.
the true cost of private pay
If this all seems a bit bleak, there is good news. Most clients think of nursing homes and $10K+ per month care when thinking about out of home care. However, the reality is that most long term care is provided at assisted living facilities, not nursing homes. Although expensive, monthly assisted living costs run more in the $4K-$7K range for most residents, at least in central Wisconsin. For many residents, this is very sustainable when offset by monthly income.
For example, take a common situation where a resident has $2500 in social security and pension income and $5500 in monthly facility cost. That resident will have a $3K/month shortfall, or $36K/yr. In many cases, financial plans are designed to allow a person to draw $36K/yr.
Whether $36K/yr is a large amount will depend on the person. For some, that actually may be a substantial drain. But for clients with $500K in investments, the $36K will be entirely sustainable. In our experience, most clients with means are able to absorb the costs of care and still pass on a substantial inheritance.
Long-Term Care Insurance
Another option that is a good choice for some clients is to invest in long-term care insurance. Traditionally, the downside of this was cost. Traditional long-term care insurance was very expensive, provided a lot of coverage, and did not pay any benefits if no care was needed.
These types of policies still exist, and can be a good option for some people. However, the industry has shifted to add options for smaller policies designed to provide a set amount of coverage to supplement a private pay strategy. This can be a better fit for certain people than a traditional long term care policy.
Our view is that long term care insurance can be a great way to mitigate risk and support a private pay strategy in the right case, but is not for everyone. This is a case by case decision to be made with the help of an advisor as part of a comprehensive financial planning strategy.
crisis ma planning
Crisis MA planning is planning at the time a person needs care. In some cases, this means evaluating the situation and noting that a private pay strategy is the best option. In other cases, the person who needs care needs assistance under the MA program.
A complete discussion of this is found here. However, the key points for purposes of this discussion are:
When a married person needs care, it is often possible to preserve significant assets for the spouse at home with proper planning.
When a single person needs care and is down to their last $100K-$150K, there are strategies available to transfer a significant portion (perhaps 50-70%) of their remaining assets to their children in many cases.
How this works is beyond the scope of this article. However, the key point here is that a choice to hold onto assets does not necessarily mean all funds will be used for care.
how we help
We are happy to talk this through in more detail as part of an estate planning consultation. To get started, call our office and schedule an appointment today.