Are you concerned about the rising cost of long-term care? Are you worried about not being able to leave your spouse or kids the assets that you’ve worked so hard to save? If so, then I'm going to share a solution to help you better plan for this big risk in retirement.
As we all know, long-term care costs are one of the biggest risks in retirement. Three of my four grandparents have needed long-term care, and the experience has been hard — not only emotionally but also financially. The cost of long-term care can be anywhere from $50,000 to $100,000 a year, depending on your location and the type of care. The average stay can be anywhere from two to five years, so that length affects the overall financial impact.
Knowing that 70% of people will need long-term care at some point in their retirement means that it is especially important for you to plan for. The only problem is — how do we plan for such costs, especially when long-term care insurance is so expensive? Add to that the fact that we have to be insurable to be able to get it. So, instead, let's talk about another option that may be attractive to some people.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The opportunity is called a Medicaid asset protection trust. The idea of this is to move money out of your estate into this type of trust so that the government cannot come after it for Medicaid planning purposes. Let's take a step back to understand how Medicaid planning works. The government will offer you free long-term care assistance after you spend down the majority of your assets. The good news is that you get the care you need. The bad news? You lose what you have worked so hard for. So how do we ensure we get the care we need but also protect what we've worked hard for? That's where this trust comes into play.
This trust has to be set up the right way
First, we must set this trust up the right way and give it enough time to satisfy the look-back period. Then Medicaid will not consider those assets when deciding if you are eligible for Medicaid. This can be of a lot of value for those with larger amounts of non-qualified assets, such as multiple properties or non-retirement investments. The things to note with this trust is you will want to make sure it is an irrevocable trust. Now, that can be scary because an irrevocable trust typically means you have no access to those assets anymore. But if you set this trust up the right way, you can still have access to those assets.
It's important to work with an estate planning attorney who specializes in this area. For our clients, we have an attorney who meets with them at our office to ensure this gets done the right way.
You also want to make sure that you’re not getting sold this trust if you do not need it, because not everyone needs it. If you don’t have any non-qualified assets, and all of your assets are in an IRA, then it may not make sense for you. Current rules state that money in an IRA will not be spent down until after both spouses have passed. Keep in mind that these rules can change at any time, and that’s why it’s important to find an attorney that you can continue to work with to make changes to these trusts as needed.
The attorney we work with meets with our clients periodically to make any adjustments required based on rule changes as they happen. We believe preparing for this now will better set you up for success if there are rule changes in the future.
Setting one up can be costly
The other downside of this type of trust is cost. Depending on who you work with to get it done, the cost can be anywhere from $7,000 to $12,000. The attorney who works with our clients does it for a lower amount since we do not take a referral fee, and we have an exclusive relationship. You’ll likely get the best results when you work with a financial planner who partners with an estate planning attorney to ensure your trust gets done the right way, that you don't get sold something you don't need and that you get the best pricing.
Other planning advantages and opportunities
A Medicaid asset protection trust can also lead to other advantages and opportunities in other areas of planning. For example, we can also use this trust to help plan for estate taxes.
Estate taxes may not be a concern for many people, considering the current high threshold before it kicks in ($13.61 million for 2024). However, the threshold is likely to be lowered in the future. It has, in the past, been as low as $1 million or less, so it’s possible that if your net worth is more than $1 million, you could pay a 40% tax on everything above that in the future.
A Medicaid asset protection trust could help you protect some of those assets by getting them out of the estate so they’re not subject to that estate tax. We do this for many of our clients who have been diligent savers.
Also, with trusts, you can be more creative about ensuring the money goes to the people you want it to go to and when you want it to go to them. For example, if you wanted your kids to get only a certain amount each year for the rest of their lives, then you could have that set up. Or if you wanted a minor child to not get the money until the age of 25, then you could do that also. You could also ensure that if there were a divorce or one of your family members died, that the money stayed in the family.
Those can all be reasons why setting up a trust can make sense. We work with many people in or near retirement who have been diligent savers, but only about half of them need trusts. That's why it's important to do your due diligence and see if this makes sense for your specific situation.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Related content
- Are You a DIY Retirement Planner? Four Things You Need to Know
- Do You Have the Five Pillars of Retirement Planning in Place?
- Are You Taking Too Much Risk in Retirement?
- Will You Pay Higher Taxes in Retirement?
- Do You Have at Least $1 Million in Tax-Deferred Investments?
-
Stocks Rise to End a Volatile Week: Stock Market TodayThe market's fear index reached and retreated from a six-month intraday peak on Friday as stocks closed the week well.
-
Kiplinger News Quiz, Oct 17 — Longest Government Shutdown?Quiz We covered stories about the shutdown, Medicare and vehicle recalls this week, but why? Test yourself on the latest financial and business news.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track RecordHomeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
-
Why Does It Take Insurers So Darn Long to Pay Claims? An Insurance Expert ExplainsThe process of verification, investigation and cost assessment after a loss is complex and goes beyond simply cutting a check.
-
Two Reasons to Consider Deferred Compensation in the Wake of the OBBB, From a Financial PlannerDeferred compensation plans let you potentially lower your current taxes and help to keep you out of a higher tax bracket. It's important to consider the risks.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
The End of 2%? An Investment Adviser's Case for Why the Fed Should Raise Its Inflation TargetYes, inflation can be tough on those living on fixed incomes, but protecting us from it too strictly could do our overall economy more harm than good.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial AdviserThe lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.
-
How the One Big Beautiful Bill Will Change Charitable GivingTaxpayers who don't itemize will be able to take a bigger deduction for donations, which could boost giving. However, high-income donors could see their tax benefits reduced.
-
A 'Fast, Fair and Friendly' Fail: Farmers Irks Customers With Its Handling of a Data BreachFarmers Insurance is facing negative attention and lawsuits because of a three-month delay in notifying 1.1 million policyholders about a data breach. Here's what you can do if you're affected.
