Long Term Care Trap
Experts say anyone 80 and over has a 100% chance of requiring long term care in the next five years. Long Term care is not just for the elderly either. Anyone at any age can get sick or have an accident and be laid up for months or more.
People assume the State will help. It may. Medicare, Medicaid and private insurance may be available at least for a while but only private insurance and Medicaid pay for long term care. Very importantly, your private medical or “medigap” insurance will generally not cover long term care so don’t assume you are protected just because you have insurance. You have to buy a specific Long Term care Insurance policy or a rider to have it!
No insurance? I’ll just apply for Title 19 (Medicare-Medicaid) right?
Yes, after you’ve spent everything and had your home (were your spouse still lives) liened. Spend everything, You qualify.
The asset protection trap in long term care comes when you pass assets on to the family either through irrevocable trusts, family limited partnerships, simple gifts and even transfers of that $13,000 per person per year the IRS allows. I have an eighty two year old client. We set up an FLP. He has two homes and some other assets probably worth just about $750,000 total in the FLP. With 16 children, grandchildren and great-grandchildren and $13,000 each year from himself and his wife, It took just two years to transfer all the assets, avoid probate, assume much greater asset protection for the whole family and do it absolutely income and estate tax free. Best part, from his point of view, he remained in control of the assets as general partner and continued to live in the two homes “caretaking” them for the partnership.
Sounds good? So where is the long term care trap?
Title 19 doesn’t recognize the $13,000 per person, per year exemption of the IRS. It has different rules entirely. ANY gift or transfer for less than value within five years of needing long term care (receipt or even pre-application) creates a long term care penalty
equal to the amount of the gift(s). So, keeping it simple, for this example he transfers $750,000 to his heirs. He cannot receive Medicaid until he has paid $750,000, for his long term care. But he doesn’t have that money any more its been given away! Catch 22: needs care now! Has no money! Can’t get state aid!
There are several solutions. Connecticut was one of the first four states in the USA to offer the Long Term Care Partnership. Buy LTC Insurance and the policy payments for LTC will cancel out prior gifts dollar for dollar. Insurance is Too expensive? It may be, especially if you’re 82!
Another option is to make all gifts conditional upon a five year, third party lien in favor of the as yet unknown long term care provider. Gifts must be irrevocable and not have a reversionary possibility (be revocable or otherwise go back to the donor) to achieve asset protection goals. Gifts do not have to be unconditional so Make ‘conditional gifts.’ How about Trusts for the proceeds to donees which have a contingent benefit to third parties (LTC providers of the donor). If care isn’t needed, the trust(s) expire after five years and a day when the gifts become unchallengeable and Title 19 becomes available. Simple and non-public contracts between donor and donees may accomplish the same effect though there is not much direct case law.
Best yet, if you’re still young and have a business, how about a post retirement long term care benefit package while you can still afford it? It may even be tax deductible to the business!
Long term care must be fitted into a complete estate and asset protection plan. EARLIER THE BETTER!
The State of Connecticut has a Long Term Care Ombudsman program to advocate for the needs of residents in assisted living facilities, nursing homes and residential care homes.
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