Do Nothing vs. Long-Term Care Insurance vs. Gifts vs. Irrevocable Trust

This entry was posted on March 2, 2015

If you need long-term care in a nursing home or at home, which in upstate New York costs around $10,000 per month, there are three ways to pay for it:

  1. Pay for your care with your life savings
  2. Pay for your care with long-term care insurance
  3. Pay for your care with Medicaid

In planning for how you are going to pay for nursing home or home care if you someday need these services, you have four basic choices:

  1. Do nothing
  2. Purchase long-term care insurance
  3. Make gifts to your children
  4. Transfer to an irrevocable trust

How To Pay for Nursing Home Costs If You Do Nothing

Most people procrastinate and do nothing even if it was not their ultimate plan. Doing nothing means that you are choosing to pay for your long-term care needs with your life savings at a rate of around $10,000 per month until you run out of money. Once you run out of savings and you have cashed in and spent your investments, you will eventually be poor enough to qualify for Medicaid to pay for the cost of your care. This means that your children will lose most of their inheritance and your spouse will have to survive on a much lower standard of living.

As we have discussed in past newsletters, all of which can be found on our website here, and in the Medicaid section of our website here, even if you are already in a Nursing Home, there may still be options to protect some or all of your life savings. So, you should not assume it is too late. However, your best chance of saving most of your assets is by choosing one of the other three planning options rather than doing nothing.

If you decide to do nothing, then at a bare minimum, you should sign the basic legal documents which are a Power of Attorney, Health Care Proxy, and Last Will and Testament. A power of attorney that contains a signed comprehensive gift rider will provide your family with the tools they need to try to protect some of your life savings. Without a power of attorney with a gift rider, a guardianship could become necessary and there is no guarantee that the court will allow any of your life savings to be protected.

Doing nothing could also cause your estate to go through probate. Probate is a court proceeding to determine the validity of your will and to carry out the terms of your will. Probate can be expensive and time consuming.

How To Pay For Nursing Home Costs With Long-Term Care Insurance

Long-Term Care Insurance: Stand Alone vs. Partnership Policy

With long-term care insurance, you can either purchase a stand alone policy that pays for your care or you can purchase a "partnership" policy where your care is first paid for by the policy and after a few years Medicaid will then step in and pay for your care.

When Medicaid pays for your care as part of a partnership policy, the government does not require you to spend away your life savings, but you are required to contribute your monthly income and generally you must remain in a Nursing Home in New York state unless you have a policy where New York has a reciprocal relationship with another state. This means that if your children live in another state, you might not be able to move to a Nursing Home to live near them.

Wide Variety of Coverage Options with Long-term Care Insurance

There is a wide variety of policy coverage options with long-term care insurance. You should retain the services of a knowledgeable financial planner to assist you in selecting the ideal coverage. Some examples are:

  1. The daily benefit for nursing home and home care such as $200 or $300 per day
  2. The length of the coverage term such as three years, five years or life
  3. The maximum policy limits such as $250,000 or $500,000 or unlimited
  4. Inflation rider
  5. Whether the policy covers home care, assisted living, day care or just nursing home care

The premiums for your policy will be based on how comprehensive the coverage is that you purchase.

Home Care with Long-Term Care Insurance

A major advantage of long-term care insurance is that if you purchase a good policy, you may be able to receive more home health care services than if you were receiving Medicaid covered home care. Medicaid rarely provides extensive hours of home care coverage, whereas with long-term care insurance, you can receive comprehensive home care coverage to help keep you home and out of a nursing home.

Protect Your Retirement Accounts and Fixed Income with Long-Term Care Insurance

You cannot transfer your retirement accounts to your children or to an irrevocable trust without causing tax consequences. With long-term care insurance, you can protect these retirement accounts without incurring any taxes.

Since you cannot transfer your fixed monthly income from Social Security or pension to your children or to an irrevocable trust as part of advance planning, long-term care insurance can protect your income for a healthy spouse and for your children's inheritance while you are in a nursing home or receiving home care.

Cost of Long-term Care Insurance

The major disadvantage of long-term care insurance is the cost. The premiums tend to be very expensive if you purchase comprehensive coverage. If you purchase lower coverage to reduce the premium costs, the policy might run out and you could still lose your life savings and family home.

For example, if you purchase a $200/day coverage, but your Nursing Home costs $350/day, you will lose your life savings at a rate of $150 per day ($4,500 per month). Another example is if you purchase a policy that only covers you for three years and if you stay in the Nursing Home for longer than three years, you will lose your life savings rapidly after the three year policy runs out. Also, annual premiums can increase over time. Recently we had a client come to our office who told us that he just received a letter from his insurance company that his premium was going to double.

Therefore, long-term care insurance is an excellent option if you can afford the premiums for comprehensive coverage and if you are healthy enough to be insurable. If you cannot afford the premiums or are not healthy enough to be insurable, then transferring to children or transferring to an Irrevocable Trust should be considered.

Basic Estate Planning and Avoiding Probate

Purchasing long-term care insurance is not a substitute for doing basic estate planning. You should still have a will, power of attorney and health care proxy. Also, you may want to consider establishing a revocable trust for your life savings and your home to avoid probate. Probate is a court proceeding to determine the validity of your will and to carry out the terms of your will. Probate can be expensive and time consuming. For a detailed discussion about revocable trusts, please go to our website here.

How To Pay For Nursing Home Costs Using Long-term Care Insurance with an Irrevocable Trust–Best of Both Worlds!

If you are unable to afford the premiums for lifetime coverage, but you desire the benefits of having a long-term care policy such as for the extensive home care coverage, another option is to purchase long-term insurance that covers you for a shorter period of time and also set up an irrevocable trust to get by the five-year look-back period and protect you from losing your life savings after the long-term care policy coverage runs out and you need to apply for Medicaid. This way you get the best of both worlds.

Making Gifts to Your Children Affects How To Pay For Nursing Home Costs

If five years goes by from the date you transfer your savings and property to your children, the Medicaid Agency will not penalize those gifts. You will be treated as though you never owned those assets and they will be protected from being lost towards the cost of nursing home care.

If you do not make it by this five-year look-back period and you need nursing home care, then your children will either have to return those funds to you or there will be a transfer penalty period imposed before you will become eligible for Medicaid.

The advantages of making gifts to your children are that it is easy to do and does not cost anything except legal fees for preparing a deed if you are transferring your home or other real property.

There are many disadvantages to giving away your life savings to your children. Some examples are:

  • Transferring to your child could make you uncomfortable and feel like you have lost control
  • Gift tax consequences of transfers
  • Transfers can increase your child's income tax liability
  • Transferring assets could affect your grandchildren financial aid for college
  • Child could get divorced and your savings could be subject to claims by the child's spouse
  • Child could file for bankruptcy and your savings could be subject to child's creditors
  • Child could be sued and your assets could be lost to the person suing your child
  • Child dies before you and your savings could pass to someone else in your child's will
  • Child could become ill and need long-term care and your life savings might have to be spent on your child's nursing home bills.

There are also advantages and disadvantages to transferring your family home to your child (or children) while retaining a life estate to yourself:

  • Your children would receive a stepped-up basis date of death value of the home if they sell the home after your death.
  • A gift tax return may need to be filed depending on the value of the home.
  • It is possible that a portion of the $250,000 family home exemption ($500,000 for husband and wife) can be preserved based on the value of the life estate.
  • You would still receive certain tax exemptions such as STAR and Veterans.
  • A life estate prevents your children from being able to sell your residence until your death unless you sign the deed (Note: Your Power of Attorney might be able to sign the deed on your behalf).
  • Once the five-year look-back period has elapsed, your property would not be counted for Medicaid eligibility purposes.
  • If a Medicaid recipient owns a life estate to real property, the net income earned by the property (rent), will have to be paid to the nursing home.
  • If the property, including the life estate is sold, the life estate portion of the proceeds of sale might need to be applied towards the cost of care.
  • When you transfer your home to your children or other family members this option legally transfers ownership to your children. They now own the house and if problems arise in your children lives, the house becomes subject to their problems, such as death, divorce or creditors.
  • If you later want to sell your house, your children do not have to agree to sell.
  • If you later have a dispute with your children, they do not have to return ownership of the house to you and you cannot disinherit them from this ownership.

Many of the disadvantages outlined above can be avoided if you transfer your home and some of your life savings to a specially designed irrevocable trust.

How To Pay For Nursing Home Costs By Transferring Assets to An Irrevocable Trust

An irrevocable living trust is created by a written agreement between you and the person you choose to manage the assets in the trust known as the trustee. The terms of the trust agreement should be tailored to meet your specific needs and objectives.

On your death, your trust assets will be distributed directly to your named beneficiaries without the costs, problems, publicity or delays of probate.

If five years goes by from the date you transfer your savings and property to your irrevocable trust, the Medicaid Agency will not penalize those gifts. Those transferred assets will be protected from being lost towards the cost of nursing home care.

When assets are transferred directly to children, the children become the owners of those assets. Most of the risks and disadvantages involved in transferring assets directly to children discussed in the previous newsletter can be avoided with a properly written trust agreement.

There are many ways to prepare an irrevocable trust and the terms of the trust can be different depending on your circumstances and how your attorney writes his/her Trusts. Therefore, the information provided below is based on a typical Irrevocable Trust prepared by the Koldin Law Center, P.C.

An Irrevocable Trust prepared by the Koldin Law Center, P.C.:

  • Will not result in income tax consequences for children
  • Will not cause financial aid problems for grandchildren
  • Will not cause you to lose your life savings if your child becomes bankrupt, is sued, involved in a divorce, dies before you, or becomes ill and needs nursing home care
  • Will not result in gift tax liability
  • Will avoid probate for all assets you transfer to your Trust
  • Will receive a stepped-up basis to the date of death value of your home and investments that are sold after your death for capital gains tax purposes
  • Will give you the right to change the beneficiaries of the trust. Therefore, if circumstances change in your children lives or in your relationship with your children, you retain ultimate control over who inherits your life savings and family home

In addition, transferring your family home to an Irrevocable Trust Prepared by Koldin Law Center, P.C., will have the following additional advantages:

  • You will still qualify for the $250,000 family home tax exemption on capital gains ($500,000 for husband and wife) when your home is sold
  • You will still receive certain tax exemptions such as STAR and Veterans
  • If a life use is reserved in the deed transferring the property to the trust, this would prevent the trustees from being able to sell your residence while you are still residing in the residence unless you sign the deed (Note: Your power of attorney might be able to sign the deed on your behalf)

For more information about irrevocable trusts, please see our website here.

In Summary, there are advantages and disadvantages with each option. At the Koldin Law Center, P.C., with offices in Syracuse , New York, we have over 50 years of experience helping individuals plan for immediate crisis and long-term care. Our attorneys are available to discuss your estate planning options. We do not charge a fee for the initial consultation. At that appointment, we will review with you all of these options: 1.) Doing Nothing, 2.) Purchasing long-term care insurance, 3.) Making gifts to your children, and 4.) Transferring your savings and family home to an irrevocable family trust. We welcome your children, family attorney, accountant, and/or financial planner to be present at the initial consultation.

There is something you can do. Figuring out how to pay for nursing home costs and other long-term care can be confusing and intimidating. We're here to help. For a free consultation, contact us.