Although long-term care carries a high cost, public policy allows for several ways to mitigate those costs through advance planning.
Advance planning always should consider the reality of the individual’s ability to pay through income and assets as well as other resources. Other resources most often include Medicaid.
First, for individuals who own a business or who own an interest in a business, business planning is imperative. When preparing for a possibility of long-term care, “simple” business planning often results in poor separation of the individual from the business and can lead to a total loss of the business.
Strong structural planning can prevent loss of business assets, ensure continuous operation and even divert business income away from the long-term care resident.
Second, the simplest and most popular way of protecting assets is simply to give them away. Property given away more than five years prior to application for Medicaid is not a countable transfer, effectively “saving” the property. This method can be useful, but should be undertaken with great caution.
Property that is given away is actually given away. The recipient owns the property and any liabilities of the recipient may transfer to the property. For example, if a farm is given to a child to protect it and the child is in a car crash and sued, or is diagnosed with an illness and suddenly needs significant medical assistance, the farm is the child’s asset and may not be as safe as expected.
Further, if the child divorces, files for bankruptcy, applies for financial assistance for their own child’s college expenses, this additional property could cause problems to them.
Perhaps more significantly are tax consequences of lifetime transfers of assets with gain. Assets transferred during lifetime are transferred with the donor’s tax basis. When the recipient later sells the property, he or she will owe capital gains on the gain from the time the donor received the property, not from when the recipient received it.
On the other hand, inherited property receives a step-up in the tax basis, which often results in no capital gains taxes owed by the recipient.
Third, many individuals have given property away but reserved a “life estate” in the property. This simply means the recipients receive the property on the individual’s death, but as long as the individual is living, the property is his or hers.
This can be a good planning strategy, but also can be fraught with long-term consequences. It should be understood first that a life estate interest is a fractional interest in the property. This means that although the Medicaid application may not count the property (if given more than five years prior), the individual still owns property. Someone will be responsible for continuing to pay for the upkeep on the property until the individual’s death.
If the family desires to sell the property, proceeds from the sale must be fractionally divided, likely causing a loss of Medicaid to the long-term care resident.
Fourth, individuals may use asset protection trusts. There are a variety of trusts that can protect assets as well as mitigate tax consequences. Of all of the listed advance planning strategies, trusts are the most complicated to individuals, requiring the work to be done up front in order to offer the best protection to loved ones; however, the increase in work results in a decrease in risk.
Families often find out too late that simple planning up front carries costly consequences later. Every person’s risk threshold is different. Evaluate your own risk tolerance to decide what level of planning you need.