On average, individuals who reach the age of 65 years will need 2 to 3 years of long-term care over their lifetime. Care arrangements may vary from an informal family member or friend providing care in the home to an extended stay in a skilled nursing facility. Presently, it is reasonable to anticipate that assisted living or memory care will run roughly $4,500 – $5,500 per month while a skilled nursing facility will run about $6,000 – $7,000 per month. These significant costs are increasing by roughly 6% per year, creating a need to plan ahead to avoid becoming destitute.
Long-term care insurance should be considered by individuals as they approach retirement age. After age 60, the window to purchase long term care insurance begins to close as premiums increase along with the risk of developing a disqualifying medical condition. Alternatively, Medicaid benefits are available to help individuals pay for nursing home care while VA Pension benefits are available as a tax-free reimbursement to wartime veterans or un-remarried surviving spouses of wartime veterans who are spending money on recurring “medical or nursing services.” Both of these programs are vital resources to families who are struggling to pay for long term care; however, these programs require that a person be virtually destitute before benefits can be awarded.
Individuals are often tempted to transfer assets to their children (or another third party) during life to avoid “spending down” assets on long term care expenses. Unfortunately, these transfers may result in a number of unintended consequences. First, such a transfer is irrevocable. Not only are the transferred assets now controlled by someone other than the donor, they are now subject to the recipient’s creditors, bankruptcy liens, divorce decrees, and court judgments. Furthermore, a transfer may forfeit the step-up in tax basis that typically occurs upon death for real estate, stocks, and other assets that grow in value over time. As a result, recipients may be subject to substantial capital gains tax liability when the assets are later sold. Finally, a transfer may result in a Medicaid penalty period being issued against someone who applies for Medicaid benefits within 5 years of transferring assets for less than fair market value.
An Irrevocable Elder Care Trust allows a client to shelter assets from being “spent down” for Medicaid or VA purposes without exposing assets to a beneficiary’s creditors. Furthermore, the client may retain control as Trustee while alive and able. In conclusion, long-term care expenses should be a primary concern for retirees and elderly individuals. It is essential to work with a competent financial advisor and elder law attorney to develop a strategy to preserve assets without forfeiting basis step-up, sacrificing control and flexibility, or trading one set of potential creditors for another.