When meeting with clients, we ask if their parents have estate plans. Many times, there are valuable things that can be done, such as planning for long-term care expenses. Our older clients rarely have long-term care insurance and cannot acquire policies because of age and health conditions. The question becomes what can be done to protect family assets from the ruinous expense of nursing home care, where annual expenses can easily reach $100,000 per year.
Our most used strategy is to have the parent (say, Mom) transfer assets to an irrevocable trust, naming one of the children as the Trustee and all the children as beneficiaries. Mom gives up her interest in the assets transferred. The reason for this is that Medicaid includes as financial resources any transfers of property made in the five years ending on the date of the filing of the application for Medicaid. The transfer of assets to the trust gets the “clock” running. Important features of this plan are:
- The assets in the trust are available for Mom’s expenses by making a distribution to one of the children who pay the bills.
- There is not any gift tax arising from the transfer of her assets to this trust.
- The plan is tax efficient, meaning Mom still reports the trust income on her tax returns. This is usually beneficial because her tax rate is less than the children’s and simplifies tax reporting.
- The assets in the trust qualify for “stepped-up basis,” meaning that on Mom’s passing, all unrealized gains are erased, and the tax basis becomes the date of death value.
- On Mom’s passing, the trust assets are distributed to the children. There is no probate administration and no tax consequences to the children.
If Mom never needs long-term care, the children inherit with a better tax result. If Mom needs long- term care, the family only pays for that care from the trust until the five-year period has elapsed. After five years, the trust assets are not included as financial resources.
Contact us at 216-621-7860 if you would like an assessment of the use of this strategy for your parents. We also recommend that our clients evaluate the suitability of long-term care insurance for themselves. On request, we will provide the names of professionals who handle these types of policies.