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Last month we discussed what happens if a loved one goes into a long-term care facility (ie. a nursing home). As you may recall, their stay in the facility will cost about $10,000 per month and may result in them spending their life savings before eventually being able to qualify for long-term care Medicaid.

This month we will discuss advanced planning options to avoid that outcome. Planning in advance is our best opportunity to maintain control of our care options as well as how we pay for our care. Most people prefer to spend the rest of their days in their own homes or at least a place where they can remain independent, and they do not want to go broke in a nursing home. But for various reasons, the majority of people do not plan appropriately for this stage of life. Remember, doing nothing is actually making a conscious decision to leave these issues to chance.

For your best chance to protect your assets, you should consider various options such as long-term care insurance products and gifting options. Insurance options may be evaluated with your trusted insurance professional while gifting options should be evaluated with legal advice from your elder law attorney and possibly your tax professional.

Gifting directly to a loved one is usually the cheapest solution, but it also has the most potential for adverse consequences. Once an asset is gifted, you have no legal right to it. The gift now belongs to the recipient meaning it is exposed to that person’s potential divorce, financial issues, and irresponsibility. In addition, it usually results in unfavorable tax outcomes where the asset has increased in value due to capital gains tax issues.

Rather than a direct gift, a trust designed for this type of asset protection usually provides the best outcome for all involved because it provides the most flexibility and protection. A gift to a trust can be a completed gift for Medicaid purposes while the trust protects the assets regardless of anything bad that can happen to the eventual recipient of the gift, meaning trust assets are protected from their potential divorce, creditors, etc. It also provides the person making the gift the opportunity to redirect who the eventual recipient will be. Since that person retains the right to change who the eventual recipient will be, it also provides a good outcome regarding capital gains taxes. It can also consolidate decision-making so that one or two trusted persons, such as children, may make decisions regarding the trust assets rather than several owners which often happens with direct gifts.

Let us consider how this could help a senior maintain flexibility while protecting assets. A person creates an irrevocable trust and transfers her home and $100,000 to her trust. She also appoints somebody she trusts to manage that trust, maybe her trusted daughter. A few years later, the parent decides to sell her home and move to Florida. Her daughter signs the paperwork and uses the proceeds to purchase Mom’s new home in Florida which is still in the trust. Eventually, the parent has a fall that requires skilled care, her new home and $100,000 are completely protected by the trust as long as they were in the trust for at least five years.

How you choose to prepare for your future is your decision, but knowing your options is how you best maintain control of that future.