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Protecting Your Savings from the Cost of a Long-Term Care Illness


Nursing Home

This is a guest post by Dagmar M. Pollex, J.D, an estate planning attorney based in Quincy, MA.  

The topic of protecting one’s savings from the cost of a long-term care situation is a key retirement planning issue for Baby Boomers approaching retirement and those already in retirement.  Additionally it is a major concern for those with aging parents as well.

Today, the risk of losing your life savings to a long term care illness looms as the largest threat to your future security. That’s why one of the biggest questions and concerns many people have about their lifetime financial security is what would happen if they suffer a long term disabling illness, such as Parkinson’s disease or Alzheimer’s.

The reason for this concern is clear. The cost of long term care varies according to where you live. Last year private room nursing home rates jumped 3.8 percent to a nationwide average of $90,520. In some parts of the country like Massachusetts and New York, the average cost is $120,000.00 to $150,000.00 a year – and increasing rapidly.

Long-Term Care Insurance

Medicare does not cover this cost so without long term care insurance, it wouldn’t take long for most families to lose all of their hard-earned life savings. If you are in your 60’s and in reasonably good health, it’s a wise idea to consult with a long term care insurance specialist. A long term care advisor can show you a variety of options tailored to your budget. But what if you can’t get long term care insurance because of a medical condition? What if your income and savings, especially after retirement, just won’t be enough to afford complete coverage?

First of all, don’t assume you need to purchase lifetime coverage. Even three to five years of coverage has provided important value to many of my clients.  To fill in the gap if insurance is not enough or if it’s just not obtainable, there is an increasingly popular asset planning technique for middle-class families today. With people living much longer these days comes the growing concern that some of the later years will eat up a lifetime of savings.

If you can’t get long term care insurance or can’t afford it or even if you have just a few years of coverage, this type of planning can protect assets from the worst case scenario of needing long term nursing home care for a substantial period of time.

Using a Trust

Planning ahead by using an irrevocable trust to preserve some of your assets helps you avoid the devastating loss of your life savings to a catastrophic illness. This type of trust which I call a Long Term Care Asset Protection Trust is also sometimes called a Medicaid Trust or an Income Only Irrevocable Trust.

The use of this kind of planning has increased in the last few years, especially since changes federal Medicaid law enacted in 2006 eliminated last minute planning opportunities. As a result, people who want preserve assets now need to plan before the need for care arises.

Many people have heard about this kind of planning but want to know more about how it works, when it should be used and the practical differences between an irrevocable asset protection trust and a revocable trust.

The Long Term Care Asset Protection Trust is a legal planning tool that is designed to protect some or all of your assets in case there is a need for an extended period of long term care in the future.

As the name implies, these trusts are irrevocable and require you to give up a certain degree of control over the assets transferred to the trust.  In exchange for protecting your assets from the astronomical cost of nursing home care, Long Term Care Asset Protection Trusts have some conditions attached to the use of the assets in the trust.

Under the terms of these trusts, the transferor (“grantor”) can receive all of the income produced by the assets in the trust for the grantor’s lifetime.  So by using a Long Term Care Asset Protection Trust, you can still reserve some control and retain some interest in the transferred assets – advantages that are not available when transfers are made outright to individuals.

You receive the income from the trust assets, but not the principal.  If you transfer your home to the trust, you can continue to live there.

Because Long Term Care Asset Protection Trusts are irrevocable, the grantor cannot revoke the trust and reacquire the assets; therefore, the assets are protected for long term care Medicaid eligibility purposes.

Long Term Care Asset Protection Trusts can be written to provide income tax advantages, and to allow the grantor some flexibility to change his or her beneficiaries. The trusts can also be drafted to allow the trust assets to obtain a “step-up” in value so your beneficiaries will not have to pay additional capital gains tax.

Dagmar is an estate planning attorney based in Quincy, MA.  Follow her on Twitter. 

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  1. I was hospitalized and on life support for 3 months at age 19. So it’s always amazed me how many people have a blind trust in their own immortality. I guess that bravado goes away as age/ill health creep up, but I think it often occurs to people far too late.

    It is important to note that Medicare will cover skilled nursing facilities. But, of course, many people with severe health conditions don’t qualify for something that intensive. Or (crazily) they want to remain in their home with their loved ones.

    I’ll definitely have to look into the trust option in the future.

    • Roger Wohlner says

      Abby thanks for the comment. Certainly your situation is a sobering reminder that we are all quite “mortal” and that a serious medical condition can hit at any age. Each state’s rules in terms of the trust option and related planning tools are a bit different so best to find someone local.

  2. I have never thought about this but I am thankful you shared this with us. As health care costs continue to rise anything we can do to prepare should be done asap. One of newest trends developing in relation to this topic is a lot of retirees are seeking medical care outside the U.S.

    • Roger Wohlner says

      Marvin thanks for your comment. Your comments are right on. In addition this post was also about the long-term care planning needs of retirees as well, this is an ever-increasing priority with the fact that we are living longer and the cost of care continues to increase.

  3. Very well written article. Anyone considering this strategy needs to explore the possibilities with an elder law or estate planning attorney in their area. It is important to fully understand how these trusts impact you and whether it is the best strategy for your particular situation. It is just one of the many tools in the estate planners tool kit.

    • Roger Wohlner says

      Thanks Steven, I think guest poster Dagmar Pollex did a great job on this article. This is an area that is complex and one that impact more and more of us as we age.

  4. Thanks for the detailed information about Long Term Care Asset Protection Trusts. Just wanted to know if we have to revoke the trust, what are the consequences?

    • Roger Wohlner says

      Thank you for your comment Nancy. The post author, Dagmar Pollex shared this response to your question: “An irrevocable trust by definition cannot be “revoked” but the trust can be written so that there are other options to transfer assets out of the trust and back to you. This should be discussed with an elder law attorney in your state, as the law varies from state to state.” If you have further questions please feel free to use her contact information from the post and reach out to her directly.

  5. One of the primary objectives of long term care insurance is to protect your assets while you receive care. This is true because people who opt to pay for their long term care needs straight from their pocket will most likely spend everything they have and they might even find them with huge debts later on. The cost of long term care is not fixed, it increases every year and the only way to combat this is through long term care insurance. It’s better to be safe than sorry, so for me this type of insurance is very essential nowadays.

    • Roger Wohlner says

      Thanks for your comment. There is no question that the costs of providing Long-Term care continue to increase and LTC insurance is an option that should be considered.

  6. Sonya Bomberger says

    The best long term care insurance is to get out of the US and move to one of the many countries that have universal health care. There are plenty of options in Europe as well as South America. I left years ago and health care or lack there of is just one of the reasons I abandoned ship. While I enjoy visiting the US I will never live there again and I make sure to always bring my Norwegian travel health insurance card with me when I visit because I refuse to risk what I would be in for probably the bill alone would give me a heart attack. I hope someday the US will catch up with the rest of the developed world and take care of their people rich, poor or middle class we all grow old and we all need care period.

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