Gifts to your Children 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.  My post of September 25, 2014 discussed transferring assets to a trust for protection against long term care costs.  My post of October 2, 2014 discussed transferring assets to a Limited Liability Company for protection against long term care costs.

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 your children (or other family members) as a method to protect the gifted assets from the costs of long term care in the future.

Transfers to others in this manner are gifts.  For long term care pre-planning, these gifts most often go to the senior’s children.  (At the time that a senior is planning ahead for long term care, the children are usually middle-aged themselves.)  Gifts can also go to grandchildren or any other relative, to a friend, to a charity, or to anyone else to whom one can make a gift.  Gifts to charities or to people outside the family are rare for long term care pre-planning.  (Gifts to charities have income tax consequences completely separate from long term care planning, but income tax issues will not be discussed here.)  Gifts for the purpose of long term care pre-planning are almost always within the family.

Why make a gift to your family?

Simply put, a gift within the family keeps the gifted money in the family.  The gift-giver expects to need long term care in the future or at least fears the costs of long term care enough to plan ahead.  By pushing assets to a younger generation, the assets stay within the family.

In addition, gifts given while the senior is alive avoid the probate process (perhaps unless the senior dies shortly after the gift.)

Considerations when making a gift

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 make this gift, you don’t yet need long term care.  It’s a PRE-planning tool.)

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

Sizable gifts 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.)

Why not make a gift to your family?

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 gifting for the purpose of pre-planning.

I’m not a big fan of gifting as a pre-planning strategy simply because I don’t trust your children.  (When I’m giving a speech, I describe my fears as “I don’t trust Junior.”)

I’m sure you have great children – responsible and trustworthy.  But, a big influx of money can affect even the most responsible person.  That responsible child may suddenly decide to build a pool or buy an expensive car or take a high-roller’s trip to Las Vegas.  The child will almost always promise himself or herself that the money will be repaid to build it back up, but all too often, that repayment never happens.

Even if your child remains trustworthy and responsible, not touching the big pile of money that came in, there are too many risks in life to make me comfortable.  The child can have a business downturn causing creditors to go after personal assets.  (After a gift, the gifted money is among the child’s personal assets.)  Alternatively, the child or your grandchild can have a car accident, and the other person in the accident could go after everything in the child’s name.  Or, your child can get a divorce, putting all assets at risk for being divided up.

A gift does not protect the gifted 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 gifts so you can make a plan that addresses your likely care needs.)

Similarly, with the VA starting to look back at prior income tax records and at least inquiring about now seemingly missing assets, gifting to children risks the possibility that the VA will deny an application for Pension (aka Aid & Attendance benefits.)

Perhaps the biggest drawback to a gifting strategy, in my opinion anyway, is that you give up control of the money that you give away.  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 trust your children with all of your life savings.  Then use gifting as your pre-planning strategy.  I don’t think I’d use gifting 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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