The Home Protection Trust
The numbers are terrifying. If you are 65 or older you
will probably need long term care at some time during your remaining life. Long
term care is very costly. It can place a big financial, physical, and emotional
burden on your family. Have you planned for the likelihood that you will need
long term care someday?
Alzheimer’s disease is one of the main culprits. According
to the Alzheimer’s
Association, one in eight people age 65 and older (13 percent) has
Alzheimer’s disease, and nearly half of people age 85 and older (45 percent)
have Alzheimer’s. The likelihood of developing Alzheimer’s doubles about every
five years after age 65.
According to the U.S. Department of Health and Human
Services two-thirds of people 65 or older will someday need long-term care assistance
at home, in an assisted living type facility, or in a skilled nursing home.
Over 40 percent will need care in an expensive nursing home for at least some
period of time. Currently the average annual cost of a semi-private room in a
nursing home in Pennsylvania is over $97,000
a year. A private room costs more.
Many of us will be unable to afford to pay for the
long term care we are likely to need as we age. Certainly few families can
pay $100,000 a year to a nursing home. Fortunately, when you run out of money
to pay for nursing home care, the government Medicaid program will usually pay.
The Medicaid Estate Recovery Problem
Since nursing homes are so expensive, most of their residents
do run out of money and end up on Medicaid. But, when you die, Medicaid expects
to be repaid for the money it spent on your nursing home or other long term
care. It will force your home to be sold to pay the government back. This is
called the Medicaid
Estate Recovery program.
Most people want their home to go to their children or
other family, not to the government. Many wonder whether there is anything they
can do to protect their home from being lost if they end up needing long term
care.
Finally, I have some good news: with expert planning, and
especially if you plan in advance, seniors can ensure that their homes will stay
in the family after their deaths and not be lost to estate recovery. Over the
next month, I plan to post several articles that discuss different planning
options that people are using to protect their homes from the Medicaid Estate Recovery
Program.
Today’s post will discuss an option that is available
to people who have the wisdom to plan in advance. It can be used to protect both the home and other
assets, including investments, for your spouse, children or other heirs after
your death. Let’s call this planning option The Home Protection Trust.
Trust has Advantages over Giving your Home to your Children
Medicaid Estate Recovery forces the sale of things,
like your home, that you own when you die. So one way people try to avoid the
recovery program is to give things away before they die.
People sometimes try to protect their homes from
nursing home costs and estate recovery by giving the home outright to their
children. They plan to rely on their children to “do the right thing.”
While this strategy may ultimately protect the home from
Medicaid Estate Recovery, it carries many risks. It’s not as simple as it
seems. One problem is that deeding your home to your children will make you
ineligible for Medicaid for a long period of time. You may have no way to pay
for that care. In Pennsylvania, under our State’s filial
responsibility laws, the nursing home can then sue your children who may
end up being personally responsible to pay for your care. (Many other states
have similar laws).
Deeding your home to your children can also have
significant tax disadvantages, and can put the senior at risk of losing the
home in the event their child predeceases them or runs into financial or
marital problems. More than once I’ve been consulted by a client who regretted
having given their home to their child and ending up with their son-in-law or daughter-in-law
as their landlord.
Usually, a better option is to deed the home so that
it is owned by a trust rather than being owned by a child. [The term trust
describes the holding of property by a trustee (one or more persons or a trust
company or Bank) in accordance with the provisions you create in a written
trust instrument.]
Using a trust, your property can be protected from estate
recovery when you die, even after a long stay in the nursing home. And since your
child is not the owner of the property it is protected from any bad things that
may happen in your child’s life as well.
A trust allows you to protect your real estate (and
other assets if you wish) from long term care costs while avoiding the risks
and negative consequences of outright transfers to children. By transferring the
home and other assets into a properly designed trust, you can still reserve
some interest in and control over the transferred assets – advantages that are
not available when transfers are made outright to a child.
For example, the trust will normally provide that you
have the right to reside in the home for the rest of your lifetime. No one can throw you out or ask you to pay
rent. You still own the home for tax
purposes, so you can still deduct the taxes, and claim any property tax
rebates. You can claim the residential exclusion from income tax if the property is sold during your lifetime. And your heirs can get a step up in tax basis if the property is sold after you die, which avoids or limits any
income taxes they might have to pay.
The Trust
Can Protect More than just your Home
Investments, such as stocks, bonds, bank accounts, and
life insurance policies are also commonly protected through the use of this
kind of trust. Because more than just your home can be protected this type of
trust is given different names. You will hear lawyers sometimes refer to it as
a “Family Asset Protection Trust,” or as an “Irrevocable Income only Trust
(IIOT),” or as a “Medicaid Trust.”
Who Can
Be Trustee?
People often name one or more of their children as
trustees - this is kind of like naming someone in a power of attorney or an
executor in a Will - the trustee doesn’t own the assets of the trust, they just
manage them according to the terms you set up in the trust.
While most people name one or more family members as
the trustee, you can also name a professional trustee like a bank. In any event, you can include a provision in
your trust that allows you to fire the trustee and appoint a new one at any
time. (I like to call this the Donald Trump “You’re Fired!” power).
This is
Not your standard Revocable Living Trust
It’s important to note that a Home Protection Trust is
very different than the standard revocable
“living trust” that many people have already set up. A revocable
living trust does not protect your assets from nursing home costs. The
Home Protection Trust is an irrevocable trust specifically designed to
protect its holdings from loss if you ever have to apply for Medicaid to pay for your long term care costs.
When you transfer the things you want to protect to
the trust you don’t have to sell them. You don’t have to change your
investments. What you own now is merely
moved under the protective umbrella of the trust. The trust can sell things held by it, and buy
new things. If your home is held under the trust, and you decide to move, the
trust can sell it and buy a new one.
I’ve created many of these trusts for my clients, including
some of my own family, over the past twenty years. Most people don’t even
notice the trust once it has been set up.
It changes things just enough to protect your assets from nursing home
costs, from issues with your children, and from the risks involved when a surviving spouse remarries.
Planning
in Advance.
Because the Home Protection
Trust involves the transfer of property for Medicaid purposes, Medicaid’s
five year look back period rule on gifts applies. This means that it is
best if you can create and fund your trust at least five years before either you
or your spouse are likely to need to apply for Medicaid.
In general, you have many more options if you plan well
ahead of any illness. Don’t wait for a
crisis to happen. With expert advice you
can still plan and protect some assets even after a crisis has hit. But because
of the Medicaid five year rule regarding gifts, many more options are available
when you plan well in advance of any need for Medicaid.
The Home Protection Trust is only one of several techniques
elder law attorneys use to help their clients keep the home in the family. Other
strategies include transfers between spouses, life estate deeds, and transfers
to a caregiver child. I’ll write about these other planning options in later
posts.
Don’t Try
this without Expert Help from an Elder Law Attorney who knows the
laws in your State
The planning that will work best for you will depend
upon your particular situation and the laws of your state. If you are concerned
that your family home will be lost because of the overwhelming costs associated
with Alzheimer’s, other dementia, Parkinson’s, stroke or another disabling
condition, see an elder law attorney in your state soon. The laws regarding
Medicaid and Estate Recovery differ from state to state – you need to get
expert advice from a lawyer who knows the laws of the state where you live.
If you live in Central or Northeastern Pennsylvania,
you can call my law firm, Marshall, Parker
and Associates for a free consultation. That’s a good way to learn about the
options available to you.
For Further Information
An article
in the Wall Street Journal discusses the Home Protection Trust. The article
calls it an irrevocable income only trust, because more than just the home can
be protected. Here is a link to the Wall Street Journal article: Solving Medicaid
Assets Math: Trusts Can Be Used To Pass On a Home; Annuities for Income (I
am quoted in this article).
See also the follow up Wall Street Journal article Answers on
Medicaid Vary State by State (I am quoted in that article as well).
Some Other Information Links
- How to Protect your Home from Nursing Home Costs – Part 2: The Life Estate Deed
How to Protect your Home from Nursing Home Costs - Part 3: Using Exempt Transfers
- 2012 Alzheimer’s Facts and Figures
