"Protecting Assets" (Against the Expense of Long-Term Care)

Lisa Nachmias Davis
Davis O'Sullivan & Priest LLC
59 Elm Street, Suite 540
New Haven, CT 06510
203-776-4400
email: davis@sharinglaw.net
www.sharinglaw.net
www.estate-elder.com

February 28, 2025
 

WARNING: THIS IS NOT SIMPLE STUFF-- THIS ARTICLE IS LONG!
NOT LEGAL ADVICE! CONSULT YOUR OWN LAWYER!  (not a "Medicaid specialist" -- an actual LAWYER)
(YOUR lawyer -- not your kids' lawyer)

Interpretation of the law differs state to state -- I am only licensed in CT

IF YOU NEED TO ENLARGE THIS, PRESS CTR +

             Note to the children of elderly clients:  Do NOT call me to set up an appointment after reading this article!  It's not your money! When it comes to planning what to do about assets, in most cases I will insist that my client is the person whose assets are in question and that I must be contacted directly by that person and must meet in private with that person.  This article gives you some idea of what I may say to your elderly parent if your elderly parent does meet with me!  (Exception:  parent is mentally incapacitated and the power of attorneys, signed some time in the past, expressly uses the word "gifts".)

            Note to elderly clients:  your priorities are up to you.  You have no legal obligation to make sure that your children inherit anything when you die no matter how wonderful your children may be.  I can think of wealthy children who inherited a lot from their parents and the result was not always terrific!  You probably have done a lot for your children already.  Having said that, if it's your money, it's your decision, and I don't think you owe the taxpayers anything either, anything more than the law requires!  And it's true that if you own your home, and need Medicaid to pay for your long-term care, in most cases the State will want to get repaid from your estate when you die so that the home won't go to your family, which is probably not what you wanted.   (There ARE exceptions and last-minute workarounds which your attorney can explain.)  This is probably not what you wanted.   But YOU have to weigh your priorities -- I won't be able to "tell you what you should do."  You decide what your priorities are.
*     *     *     *     *

           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 -- if you were applying for Medicaid within five years, 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, such as gifts to a disabled child).  This article also does not 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 and definitely talk to an attorney if this is your situation,. There are many ways to protect assets for one spouse's needs when the other spouse needs Medicaid.

           This article is not about these types of gifts.  This article addresses your desire to "protect assets from the state" or "from the nursing home," that is, from being consumed by future long-term care expenses of both yourself and your spouse.

           On the one hand, it is well established in law that individuals are entitled to take advantage of the laws and use the laws to their own advantage.  Even when it comes to the IRS, individuals are entitled to plan to minimize their taxes.  True, you can't give your property away to avoid an existing creditor (like the person you just hit with your car).  That's called a "fraudulent transfer" which just means that the law will undo the gift to protect the crecitor.  BUT, if you give something away now, at a time when you do not have long-term care expenses, that is not a fraudulent transfer provided you believe you are doing it in such a way that the nursing home will get paid by Medicaid, if not by you.  But on the other hand, just because you can do something, and that it's legal, does not mean you should.  There is no magic bullet. If it sounds too good to be true -- it is.  Don't let anyone tell you that you "should" give your house to the kids, etc. much less your money.  Know the law and the risks before you act.  It's your choice to take those risks if you want.  

             Some risks you should know:
    1. Any gift (by you OR your spouse) made within the five years prior to applying for the Medicaid benefit that pays for long-term care -- nursing home or home care -- can be problematic.  It creates the potential for disqualification from coverage, about one month of ineligibility per roughly $14,939 gifted (CT -- 2024-5 figure, changes every July), unless the gift is "exempt."  (There is a similar but not identical rule for VA benefits and a much tougher rule for care in residential care homes.)  I did write an article about these exemptions.  If you are in a nursing home, as a practical matter you do not get kicked out, but usually the nursing home would try to come after whoever signed the form where it lists the obligations of the "responsible party."  Connecticut law also gives the nursing home the right to sue some gift recipients when a gift was made in the prior 2 years, if Medicaid is denied and the nursing home is unpaid.  But if you are not in a nursing home and trying to get care for home and community-based services at home, and this happens, you might go without care, possibly with disastrous consequences, as my article indicates.  Maybe the person to whom you made the gift would pay for your care -- but maybe not.   What if the person dies before you, for instance, or goes broke?

    2. If you (or a spouse) transfer assets to a trust (other than a trust in a will that is created when you die), and if the trust agreement says that at any time --for any reason, even if it's up to the trustee -- you can get something other than "income," the trust won't work -- it is still treated as if it were still yours.  Even if you are only entitled to the income, there can be problems.  CT regulations claim that if the trust makes distributions of the trust's assets to other beneficiaries, this could be counted as a brand new transfer that will start the 5-year look-back running.  CT law also says that if you slip up and apply for Medicaid within the 5 years, the state could terminate the trust.  In other words, you cannot transfer assets to a trust that names you as a beneficiary, with the possible exception being a trust that only gives you "income," and "protect" the assets while being eligible for benefits.

    3. If you give something away based on an agreement that the person will use the money for your benefit, that is really a trust, and if you don't report it as a trust, that could be fraud. 

    4. On the other hand, if you give something away and just "wish" and "hope" that it "might" be used for you someday, but it wasn't an agreement -- there is nothing you could enforce in court - - that isn't a trust.  But it also means you can't necessarily rely on someone's promises about what they will do.  Any gift to person made with the "wish" and "hope" that it will be used for you, is a GAMBLE, affected by that person's wishes, future divorces, creditors, death, disagreements, and so on.  The number of times people have said to me "I was going to give my house to my daughter, but since she later got divorced, I'm glad I didn't." Or the time mom and dad "added son's name to the deed," and then HE had a car accident and needed Medicaid and they had to buy their own house back.

    5. How about a trust that does NOT name you or a spouse?  That only has your kids as beneficiary?  Setting up a trust like this is just a fancy way of making a gift to the beneficiaries named in the trust.  If done correctly, the assets are protected from the child's divorces, creditors, detah, etc.  but it is still a "wish" and "hope" situation.  After 5 years, it works, the assets are not counted as yours.  You still don't control the assets.   You should not be trustee.  If anything has to come out of the trust (let's say you need Medicaid in 4 years, and the children cannot pay for your care themselves), the Trustee would have to "decide" to distribute trust assets to the children who would then have to decide to use them to pay for your care.  Normally that means the trust gives the trustee broad discretion about when and to whom the assets can be distributed.  But you wanted everything to go equally when you died! The trust most likely will say that but will also say that when you are alive the Trustee can do whatever the Trustee thinks best which could be distributing to only one child.  Keep in mind that a Trustee owes a duty to the people named as beneficiaries, defined by the terms of the trust document, but you are not a beneficiary.  If the Trust document says "this trust is for whatever the Trustee thinks is advisable," or for the "welfare" of any one or more of the beneficiaries, nothing stops the Trustees from taking out money for a child to go on a cruise, after all.  You cannot sign a trust that says it is intended to benefit A and B, thinking it is really for your own benefit, and make that legally binding.  Some trusts will require an "independent" trustee to sign off on distributions, as a kind of protection. The idea here is that YOUR LAWYER will be the independent trustee and will only release the money if A and B agree to use it for you.  The Trustee is "independent" from the beneficairies.  But what will the State say, if the person is your own lawyer?  And could A or B or their children sue the lawyer for signing off on a distribution intended to benefit you when the beneficiary actually takes the money for a cruise, or even uses it for your home care just because you like the aides from one agency better than those from the state?  And what if the Trustee dies?  Not to mention that some lawyers will charge a pile to be "independent trustee."  Ultimately, if this type of trust is set up, you are putting a lot of faith in the Trustees to do what is right, and you are hoping that the people you name as Trustees will remain in charge. To be clear -- people ask me to create these trutsts. I do create them. (see #3 below) I might do this myself, who knows.  But you must go in with your eyes open.

    6. What if you give assets to your children and THEY set up a trust for your benefit?  This gets back to #3. If it's a package deal -- I give to you, you set up trust for me -- then it's no good.  If you give assets away and "hope" they will do it, and they do, after a long pause, maybe..

            All this being said, what's your best best if you don't want your life savings wiped out, you really want your children to inherit something, you believe your children would help you if you needed it, and you decide that the risks are worth it?   Does it make senes to do something?

            If your real 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 #5, subject to the risks described above.  If it's your house, a common arrangement is to have sign a deed putting the house in the trust but retaining a "life use" or right of occupancy or signing some sort of lease.  This is not illegal, although it may create problems if you need care within 5 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 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.  The most likely would be to give money (you can't be joint on the account) but have a way to keep an eye on it.. 

            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 others, the gift recipient 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.  The trust will have to be disclosed as part of the Medicaid application.  This may be the most expensive.

              3.         Gift to Trust for Children or Others (Not You/Spouse) (see #5 above).  Instead of giving outright to children, you could give to a trust for the benefit of your children or others.  The trust document would not name you or your spouse as beneficiary.  The purpose of the trust would be to make sure that there will be some protection for 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.  Lawyers have different ideas about what is "safe," I prefer that you not have the power to change the trustee.  Example of things the trust document might include:
  
    * The trust document might give you the power to re-arrange the beneficiaries by adding some, dropping others, or reallocating, provided you cannot do it in return for payment or benefit.  This is called a "power of appointment" and can be important to prevent capital gains tax when a house is sold or after your death.
    * The trust document might let you add charitable beneficiaries (but make sure it excludes charities that provide long-term care -- some nursing homes are actually 501c3.)
    * The trust document might give you the right to name a new trustee if the old trustee quits or dies, or the power to remove the trustee if you can't appoint a successor. (I'm not comfortable with a trust that lets you remove the trustee.)
    * The trust document might give you the power to switch what's in the trust for other property of identical value -- sometimes important for income tax reasons -- apparently this is a problem if you live in Florida or some other states.
    * The trust document might include a third-party "trust protector" --- someone who could remove the trustee, but isn't you.  Or, you could include an "independent" trustee (who will probably charge for being trustee).
    * The trust document could require the Trustee to send you copies of the trust's accountings during your lifetime.  (Practically speaking, the Trustee could tell the broker, etc. to send a courtesy copy of the statements to you every month.)
    * Some trust documens give you the right to live in the house if you put your house in the trust -- I worry that this will be treated as more than income, but it's probably OK.

           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 itself.

            5.         Protecting Assets Only After One Spouse Dies.  When both spouses are living, unless the ill spouse has a large IRA or you have vacation homes, much can be done to keep the assets for 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, or leaving a life use only to the other spouse. 

            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.  The State thinks it's a gift if the rate is higher than the  minimum wage or if the "services" are things a child would naturally do for a parent.. 

            7.         Set up an LLC with multiple owners.  If you or your spouse apply for Medicaid and you own an interest in an LLC, and if you have no power to sell the LLC without the consent of other owners, the asset may be excluded, in other words, you or your spouse get to keep it while qualifying for Medicaid.  Problem:  if you die with no surviving spouse, received Medicaid, and have probate, the State will have a claim, which can be messy -- so if you try this rather exotic approach, be sure the lawyer thinks up some way to avoid probate. This might make sense with a business, rental property, a vacation home with many owners -- that kind of thing. Not investments. 
  
               8.        Multiple Owners of Property.   Starting in 2021, Connecticut no longer records a property lien when someone owning real estate applies for long-term care.    Whenever there are two owners, the property can't be sold unless both consent.  Current law doesn't require the medicaid applicant to go to court to force a sale.  This means that the property should be exempt -- and if it can avoid probate, should escape a claim when you die -- so the gift would be made to you and the other owner "with rights of survivorship."  This might make sense if you really don't have five years in which to plan.  You might sell a small interest in in the property (you can even sell for a promissory note, so long as it meets certain requirements) rather than making a gift.  (Same idea could work with an LLC).  

             9.         Purchase of Life Use.  Since 2005, it has been permitted to purchase a life use in someone else's home -- provided you live in the home for at least one year after the purchase.  A problem is that a "life use" may not be worth so much.    For an 80 year old woman, "life use" in a $250,000 home is worth about $60,000 per DSS tables.

             10.        Plan to Live With Your Child.  A major exemption is the "caregiver child." If you live with a child for 24+ months and if during that time you would have required long-term care if you had not lived with the child -- you needed assistance with activities of daily living, or supervision --and if this is properly documented -- NO PENALTY if you transfer $358,536 (or more, if you lived with the child more than 24 months) to that child. This also works if you make the gift and live with the child after.  Of course, for some, living with a child is almost as bad as a nursing home! :)
GOOD LUCK!
THERE ARE NO "RIGHT" ANSWERS

IF WE COULD FIND THAT MISPLACED CRYSTAL BALL,  LIFE WOULD BE SO MUCH EASIER.
This is not legal advice, but a general analysis.

CONSULT A LAWYER  - NOT A "MEDICAID SPECIALIST"