How to Keep Assets Safe for the Long Term

Today, the risk of losing your savings to a long-term care illness is a very real threat to your future security. That’s why one of the biggest questions and concerns many people have about their lifetime financial security is what would happen if they suffer such long-term disabling illnesses as Parkinson’s or Alzheimer’s.

Protecting one’s savings from the cost of a long-term care situation is a key planning issue for baby boomers approaching retirement and those already in retirement. It’s a major concern for those with aging parents as well.

With proper planning, you can achieve Medicaid eligibility and maintain your financial status and lifestyle. You don’t have to be destitute or spend all your assets; you simply have to qualify by meeting certain financial criteria. This is accomplished by transferring assets and setting up trusts. A lawyer proficient in applying these techniques can help you choose among what is available.

Using a trust

An irrevocable trust preserves some of your assets. The Long-Term Care Asset Protection Trust is sometimes called a Medicaid Trust or an Income-Only Irrevocable Trust. Changes to federal Medicaid law enacted in 2006 eliminated last-minute planning opportunities in most states (except California) and, therefore, people who want to preserve assets now need to plan before the need for care arises. The look-back period is five years (2.5 years in California), meaning that the assets should be transferred years before you need long-term care.

The Long-Term Care Asset Protection Trust is a legal planning tool and irrevocable, which means the grantor cannot revoke the trust and reacquire the assets, so it is protected for long-term care Medicaid eligibility purposes.

In exchange for protecting your assets from the astronomical cost of nursing home care, Long-Term Care Asset Protection Trusts have some conditions attached: The transferor (grantor) can receive all the income produced by the assets but not the principal in the trust for the grantor’s lifetime. This allows you to reserve some control over the interest in the transferred assets — an advantage not available when transfers are made outright to individuals.

You receive the income from the trust assets and, if you transfer your home to the trust, you can continue to live there.

Long-Term Care Asset Protection Trusts can be written to provide income tax advantages and allow for some flexibility in changing beneficiaries. The trusts can be drafted to allow the trust assets to obtain a “step up” in value so that your beneficiaries won’t have to pay additional capital gains tax.

Another option is to transfer to a protective trust structure a lump sum from your pension, allowing it to be treated as an asset. Otherwise, it’s considered an income stream, vulnerable to nursing home contribution.

Legally, once the money is in a trust, you don’t own it anymore, but the trust can be constructed so that money can be made available for your needs to help you maintain your quality of life. What’s left after you pass on can go to your loved ones.

By transferring your lump-sum distribution to a trust, you’ll be eligible for Medicaid to pay all or a significant part of the cost, depending on whether the transfer was made beyond the look-back period.

If you eventually need nursing home care, any income streams you receive from your pension or deferred compensation will go to the nursing facility. It’s a Medicaid requirement to pay for at least part of your care. If you take the lump-sum option, you’ll have the opportunity to protect that money by putting it in a trust.

The lump-sum distribution also works for an IRA: The after-tax balance is placed in a protective trust. Excess income is transferred to a Pooled-Income Trust. With this planning, you can retain the benefit of financial reserves, without having to “spend down” resources under Medicaid eligibility requirements

The money from the IRA will remain protected, as long as it is put in the trust before the look-back period.

Many people turn to trusts to protect assets rather than an outright transfer, which can be lost due to divorce, creditors, bankruptcy or unwise investments. The spouse or child could spend all your assets during your lifetime.

With a trust, you don’t have access to the money — only the income that the money or property in the trust earns can be distributed to you. The trustee should be given no discretion to distribute trust principal to you, otherwise the principal is considered a resource for Medicaid purposes.

Of course, rules are changing all the time, and each family’s situation is different. Give us a call and we’ll make sure to take care of your family’s needs, taking into account the latest laws and regulations.

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