Planning for the future can be overwhelming, especially when it comes to deciding whether to create a will or set up a trust. Through my experience, I’ve found that even these steps might not be enough to ensure your lifelong savings are passed on to your loved ones.
Here’s a bit of my story. Recently, both of my wife’s grandparents were diagnosed with severe Alzheimer’s, and their condition deteriorated quickly. We had to make a rapid decision to move them from their home into a nursing facility.
Have you looked into the cost of nursing homes lately? During our search, we discovered that the average cost is around $8,000 per person each month. Yes, that’s $16,000 per month for both of them, totaling $192,000 per year! This figure aligns closely with the national average.
So, how do people afford this? Most elderly individuals apply for Medicaid, which utilizes taxpayer money to cover these expenses. However, Medicaid has stringent rules. One major rule is that you can’t own more than $2,000 in assets (excluding your home) to qualify for benefits. Essentially, you need to spend nearly all of your savings before gaining assistance, a process known as a “spend down.” At $16,000 per month, this doesn’t take long.
Imagine working your entire life to save and sacrifice, only to have it all taken by private nursing homes before government help kicks in. This might explain why inheritances seem less common these days.
As a father thinking about the future of my family, I want to ensure my financial legacy reaches the right people.
After some research, I found information online about bypassing the Medicaid spend-down using irrevocable living trusts.
It’s crucial to understand the difference between a revocable and an irrevocable living trust. A revocable living trust allows you to avoid probate while keeping access to your money because you can revoke it anytime. An irrevocable trust, on the other hand, is different.
Here’s how an irrevocable trust works:
Let’s say you have $1 million. If you move this money into an irrevocable trust, you relinquish your rights to it permanently. However, you can still receive income generated from these assets. For instance, if your $1 million generates 4% dividends, you would receive $40,000 annually.
This functions somewhat like an annuity. While you’re alive, Medicaid can’t count this trust as part of your assets since you’ve legally given up ownership. As long as the trust wasn’t set up within five years of applying for Medicaid, it remains protected.
However, Medicaid can claim the income you receive from the trust. In our example, the $40,000 would go to them.
After you pass away, the money in the trust goes to your beneficiaries as intended. It bypasses probate, and Medicaid cannot claim it to recover any costs for your nursing home care.
Mission accomplished! You’ve successfully passed on your wealth as planned.
But what if you transfer the money too early? How do you know when you might need a nursing home? You don’t want to limit yourself prematurely.
These concerns are valid. If considering this strategy, ensure you have ample time to meet the five-year rule and enough savings. The last thing you want is to disqualify yourself from necessary government assistance.
