Gifts to Trusts as a way to Protect against Long Term Care Costs

Today’s blog post continues the series about giving money away as a method to plan ahead for protection against long term care costs.  My post of September 19, 2014, the first installment of the discussion on gifting, described how the Medicaid “Aged, Blind and Disabled” program and the Department of Veterans Affairs “Pension” (aka VA “Aid and Attendance”) program look at assets given away.

The current series on gifting is part of a more comprehensive series on possible ways to plan ahead to protect against long term care costs.  Previously, my blog discussed long term care insurance as an approach to planning ahead for long term care costs.  In the long term care portion of this discussion, my post of May 22, 2014 discussed whether to buy long term care insurance at all.  My post of May 29, 2014 suggested looking for a stable, proven insurer.  My post of June 5, 2014 described how to identify a proven, stable Long Term Care insurance company.  My post of June 12, 2014 discussed the importance of protection against inflation. My post of June 19, 2014 suggested planning to use insurance to pay for four or five years of long term care.  My post of June 22, 2014 suggested a daily rate to choose when purchasing long term care insurance.  My post of July 10, 2014 advised to look carefully at the list of Activities of Daily Living that can trigger coverage from the long term care insurance policy.  My post of July 17, 2014 described the differences between a “period of time” kind of coverage and a “pile of money” kind of coverage.  My post of July 25, 2014 advised to make sure that the long term care insurance includes coverage for cognitive impairment.  My post of July 30, 2014 described the differences between tax-qualified and non-qualified policies.  My post of August 5, 2014 discussed the value of long term care insurance policies that qualify for the Partnership program.    My post of August 14, 2014 discussed hybrid policies that combine long term care insurance with life insurance.  My post of August 21, 2014 described how a long term care insurance policy with a return of premium rider can be used to construct a “hybrid” life insurance/long term care insurance policy.  My post of August 28, 2014 described how to use a partnership policy to protect just enough of your life savings while holding down the cost of the insurance.  My post of September 5, 2014 described how to coordinate long term care insurance with potential veterans benefits.  My post of September 12, 2014 discussed how an elder law attorney can help maximize the value of long term care insurance.

The introductory post in the series on planning ahead for long term care costs appeared on May 15, 2014.

Today’s post, as part of the sub-series on to how to give assets away, discusses gifts to trusts as a method to protect the gifted assets from the costs of long term care in the future.

Why transfer money to a trust?

Transferring money to an irrevocable trust lets you send that money wherever  you tell the trust to send it.  (For an irrevocable trust, you need to determine at the time you first set up the trust where you want the money to go eventually.  You can’t decide later.)  Should you need long term care after setting up the trust, the money in the trust is not available to you, so it can’t be used to pay for your long term care (assuming you write the trust the correct way.)

In addition, assets in the trust normally do not go through the probate process.

Considerations when making a gift to a trust

Don’t transfer everything you have.  You still need to live off your life savings.  Keep enough back to support yourself for the foreseeable future.  (Remember, at the time you’d put assets into the trust, you don’t yet need long term care.  It’s a PRE-planning tool.)

Depending on the size of the transfer, a gift tax return may be necessary.  If the transfer is very large, the actual payment of gift tax may be required.

Sizable transfers reduce the unified credit that the senior’s estate will have available before triggering a requirement to pay federal estate tax.  (A similar result may occur in calculating your state’s estate tax as well.)

A transfer to a trust does not protect the transferred assets from long-term care costs until the five-year look back period has passed, according to the requirements of Medicaid.  (This means, if you feel that you will need long term care within the next five years, you should talk with an elder law attorney before making any transfers (to a trust, to a person, or to anywhere else) so you can make a plan that addresses your likely care needs.)

Why not transfer assets to a trust?

First, you must decide if you’re worried about the possibility of long term care costs in your future.  If you’re not worried, then don’t use a trust for the purpose of pre-planning.

I’m not a big fan of trusts as a pre-planning strategy simply because trusts are a hassle.  They are a separate “person” for tax purposes, and the income that the trust earns must be reported and the resulting tax paid.  Non-grantor trusts (and this should be a non-grantor trust) must pay at the top income tax bracket whether the trust has high income or low income.

You need to have a trustee that you trust.  You can’t be your own trustee, and your spouse can’t be the trustee either.  This trustee will own (in a fiduciary capacity) much or most of your life savings.  Do you have someone that you trust that much?  (You could pay a bank or trust company to manage the trust, but that costs money, and it still requires you to trust the bank or trust company.  Over all, I’m not a big fan of banks trust companies to hold these kinds of trusts.  Trust companies are great at watching the trust’s money, but they tend not to use the optional powers of the trustee that may have been put into the trust as a way to carry out the wishes of the person who funded the trust.)

The trust must be irrevocable.  Once you set it up, you can’t take it back.  This isn’t an estate planning trust.  It’s very different.

Medicaid will look very hard at the trust to look for any way that the money can come back (or be forced to come back) to a Medicaid applicant.  If Medicaid finds any opening, the trust will lose its protection against long term care costs.

Perhaps the biggest drawback to using an irrevocable trust (in my opinion anyway) is the same drawback as in any gifting strategy.  You give up control of the money that you put into the trust.  Imagining myself retired, I’m not sure that I’d be emotionally comfortable giving up control of a big part of my life savings.

It’s your choice.

Perhaps you have no fear of any of the risks I describe.  Perhaps you have someone you trust to manage your money.  Perhaps you’re comfortable with the hassles of a trust.  Then use an irrevocable trust as your pre-planning strategy.  I don’t think I’d use one for my pre-planning, but it may be the perfect approach for you.

For more information, visit Jim’s website.

Jim Koewler’s mission is
“Protecting Seniors and People with Special Needs.”

For help with long term care or with planning for someone with special needs,
call Jim, or contact him through his website.

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