"Protecting Assets" (Against the Expense of Long-Term Care)
Lisa Nachmias Davis
Davis O'Sullivan & Priest LLC
WARNING: THIS IS NOT
SIMPLE STUFF-- THIS ARTICLE IS LONG!
NOT LEGAL ADVICE!!! CONSULT YOUR OWN LAWYER!! (not a "Medicaid specialist" -- an actual LAWYER)
Intepretation of the law differs state to state -- I am only licensed in CT
The law is clear: gifts that you (or your spouse) make exclusively for reasons other than qualifying for Title 19 should not have negative consequences for you or your spouse if either of you needs to apply for Medicaid within five years. Practically speaking, of course, there may be problems -- you would have to prove your motivation by clear and convincing evidence, and some states make this nearly impossible. Read my article on this topic. This article does not address such gifts (or other, exempt gifts, discussed in the same article). Nor does this article address the last-minute strategies that can be used to help one spouse when the other spouse needs care, such as purchasing a more expensive home, annuitizing an IRA, purchasing a "Medicaid annuity" that will repay the State when the owner dies and the other spouse has received Medicaid, etc. Read another article on that.
Instead, this article addresses your desire to "protect assets from the state" or from being consumed by future long-term care expenses of both yourself and your spouse. I am not judging this motive positively or negatively. Connecticut cases speak negatively about this motivation, and New York cases take the opposite view. Transferring assets to avoid paying creditors or becoming insolvent is considered a "fraudulent transfer" (which also doesn't mean bad, or evil, only that the law lets a creditor undo the transfer in order to get paid, in some situations). On the other hand, it is well established that individuals are entitled to take advantage of / use the law to their own advantage or the advantage of others, at least when it is a question of tax planning, even if the IRS is considered a future creditor! If you make a transfer and you don't have long-term care expenses right now, you're not avoiding creditors or becoming insolvent! But that doesn't make it a good thing to do or a "no brainer" either. This article is not "pro" or "con." You should know the law and the risks before you act. There is no magic bullet. Any course of action has risks. Whether the risks are appropriate is your judgment. But if it sounds too good to be true -- it is.
Some facts and risks you should know and appreciate:
All this being said, is there anything you can do if you foresee your hard-earned assets being "wiped out" by the cost of long-term care and feel this is unfair and/or will make you unable to maintain your lifestyle just because your spouse had the misfortune to get sick?
If part of your motivation is to benefit others, not yourself, the answer is "yes." You may choose to assume some of the risks noted and make gifts to children or other beneficiaries, outright or in a trust described in #7 or #8, subject to the risks described above. This is not illegal, although it may have serious ramifications if you need care within five years. You will be assuming the risk that doing this may cause you harm, and you are weighing that risk against your desire to benefit your children (or other beneficiaries). Besides, it is natural to think that if you give money to your children, they will thank you by helping you later. Gifts in trust may mitigate some of the risks, but they are more expensive and more complicated. Sometimes necessary -- but more expensive. My fee for doing a trust of this kind will be at least $2,500.
If your motivation is primarily to benefit you or your spouse, out of concern that if one spouse gets ill, the law won't let the other spouse keep enough to maintain his or her lifestyle, making gifts outright or in trust seem like a poor choice to me. Anything that causes you both to part control of assets puts those assets at risk of not being used for your benefit. You may have other wants and needs besides long-term care and not controlling those assets will mean they may or may not be used to meet those wants and needs. It may all work out as you intend, but there are no guarantees. As long as you are both living, most of the assets can be preserved for the "healthy" spouse, and he or she can then use a trust in his/her will to ensure that those assets (other than annuitized funds) can be used to provide supplemental needs to the survivor. If you, the healthy spouse, feel it is virtually certain that this scenario will play out -- that one spouse will have expensive care needs; the law won't let the other spouse keep enough to maintain his or her lifestyle; that the money will be wiped out anyway -- you might choose to do this kind of gift planning, keeping in mind that it won't work completely if Medicaid is needed within five years.
If you are prepared to assume these risks, have weighed the pros and cons, the advantages and drawbacks, the risk of "using up" assets on long term care versus the risks of losing access and control to assets for your wants or needs or to meet long-term care expenses that come up during the next five years, what are your options?
1. Outright Gift to those who may, possibly, return the favor by helping you later. Naturally, this is best done when you really don't anticipate needing the help within five years and/or have additional reasons for making the gift. This has the advantage of simplicity, and the disadvantage of the greatest exposure to the recipient's risks. If the gift is a house, money in an IRA, or an appreciated security, there are additional tax drawbacks, which can be discussed.
2. Outright Gift, which you expect (but can't require) will be put into a trust for the benefit of you or your spouse. Provided the gift is outright to children or other third parties, they could (after an appropriate interval of time) set up a trust with you/spouse or including either of you beneficiaries. This provides you with the greatest protection against completing claims on your children, but is quite risky, because the trust must be disclosed and the State might decide it is an available resource, that it was really created with your money and thus, by you. The gift cannot be made on the condition that such a trust be set up and should not be part of a single transaction. Any gift recipient would do well to use his or her own, different attorney, and to wait a significant interval (at least thirty days, preferably longer) before setting up the trust; assets should go into it from the third parties, not from you. This is mentioned purely by way of information to children who feel guilty about accepting such a gift, or worried about accessing the money later on if you need help. The benefit of your children naming you in the trust is more protection for you; the drawback is that ultimately, this will complicate Medicaid and may fail to "protect" the assets.
3. Gift to Trust for Third Parties (see #7 and #8 above). Instead of giving outright to children, you could give to a trust for the benefit of your children or other third parties, not naming either of you as beneficiaries. The purpose of the trust would be to make sure that there will be some control over the property during your lifetime in the event of the death, divorce, or bankruptcy of a beneficiary. This still leaves you exposed to the risk that the beneficiaries will be unwilling or unable to access the trust property to use it for your benefit. You should not be the Trustee of this trust. Example of things the trust document might include which are legally OK but which could probably create problems if the existence of the trust comes to light in future and is reviewed by the state:
4. Gift of Home with
Retained "Life Use" or other right retained by deed. A
popular choice is a gift of the home while retaining a life use or a more
limited "right of occupancy" on the deed. The disadvantage is
that the home is an asset that the healthier spouse can keep anyway if one
spouse requires care, so it seems a shame to complicate matters by a gift; this
is more often done by a widow or widower, or a single person. There are
some other disadvantages in the event that the house is sold during your
lifetimes; you can lose the benefit of the exclusion on capital gains from sale
of a personal residence, among other things. One way to resolve this is
by giving the remainder to a trust (as described above), rather than the
children. Sometimes you can retain the powers discussed above in the deed
5. Protecting Assets Only After One Spouse Dies. When both spouses are living, the Medicaid rules do offer some asset protection possibilities so as to prevent premature impoverishment of the "healthy" spouse. This is no longer an option when a person is a widow or widower. A couple may hedge their bets by dividing assets and each having a will leaving the deceased person's share in a trust for the benefit of the surviving spouse. The surviving spouse doesn't have control over the property, but the trust can say it is for the benefit (not support) of the surviving spouse. It may be necessary to require that 1/3 is held in a trust that entitles the surviving spouse to income.
6. Personal Services Contract. If you anticipate a lengthy period of time during which someone will be helping you or your spouse without expectation of payment -- you may be able to set up a contract to pay that person. This is a chore, has some tax consequences, and has its own risks, but over time the effect might be to remove assets that later on would in practical terms be available if the recipient chose to help you later. You may be able to set it up so that the care is provided now, and the payment later. The State may require the helper to keep track of his or her time.
THERE ARE NO "RIGHT" ANSWERS
IF WE COULD FIND THAT
MISPLACED CRYSTAL BALL, LIFE WOULD BE SO
This is not legal advice, but a general analysis.
CONSULT A LAWYER - NOT A "MEDICAID SPECIALIST"