Why Asset Protection Planning is the Next Step for Your Long Term Care

So, you have a traditional trust — one that is revocable, and changeable, and will avoid the need for a guardian or probate in the event of incapacity or death.  But, did you know that this type of trust offers no additional protection against your creditors, not during your life nor after it?  For many people it is this gap — the lack of protection against the rising cost of long term care and the risk to their non-liquid assets — that motivates them to use an irrevocable trust to hold their assets.

The reality is that the cost of long term care is increasing exponentially.  In 2015, the US Department of Health and Human Service’s determined that the average cost of care is $138,000 per individual.  In the same month, Forbes Magazine estimated the higher figure of $265,000 per individual.  This is not limited to medical care costs like a hospital stay, or medication.  Long term care is defined as the care one needs to meet their basic activities of daily living, like meal preparations, using the rest room, paying bills, or taking medication.  According to the same government study, each of us has a 50% chance of needing assistance to meet these needs if we are 65 years old and older.  And, sadly, between inflation, and economic troubles, and decades of relying on limited pensions and social security to meet financial needs, the reality is that many people do not have the liquid investments on hand to meet the rising cost of their long term care needs.

Many people work hard their whole life and have much to show for it.  They have loving family, good friends, a legacy of giving and serving in our community, and often they have significant non-liquid assets — things like a paid off house, ranch land, rental properties, or a business.  While they have these amazing resources, they lack cash on-hand:  they do not have significant cash or investment holdings in things like IRAs, 401(k)s, brokerage accounts, or just plain old bank accounts. Based on the 2015 studies, individuals should have a approximately of $265,000 in liquid assets, and married couples should have $530,000.

So what happens if your need for long term care exceeds the cash you have available?  Then you have to start selling your business interests, rentals, and carving out ranch land to liquidate.  This is because you cannot qualify for assistance with your long term care or nursing home bills if you have too many assets in your name.  Once you are left with approximately $2,000 in the bank, your home, and a car, you could apply for Medicaid.  (For a married couple, the “healthy” spouse, at home, can keep the house, car, and $119,220.)  But to reach this threshold, you have had to undo a lifetime of hard work — and maybe even destroy a family business or multi-generation enterprise along the way.   Even if you are able to keep the house during life, Medicaid is not free and the State will recover from your estate anything Medicaid paid out during life.  In this way, the equity in your home will be taken after you have passed away, potentially wiping out any inheritance you might leave for your loved ones.

This is why I believe that proper business and asset protection planning is the next step in helping families prepare for the rising cost of long term care.  It does require the client to establish an irrevocable trust — that is, a trust that the client cannot later change, revoke or amend.  But after a period of time, the assets in the trust are invisible to the client’s future creditors.  Within two years, any basic creditor cannot force that asset to be sold to satisfy a future liability, and after five years, the asset cannot be counted against the client for the purposes of qualifying for government assistance for long term care.  In this way, a portion of your estate can be preserved for your benefit and the benefit of your loved ones, without having to be sold or dismantled to afford your long term care.

Asset protection planning takes several years to be effective — it is not something you can do overnight.  It is best suited for families that have a low liquidity, high asset ratio.  It is designed to prevent the dismantling of businesses between the generations, and I have used it to assist ranching families, small business families, and families with multiple rentals ensure that what they have worked so hard to build is still there for their children.  If you have worked hard, and built a lifetime legacy which includes property you wish to preserve for future generations, but you have limited cash resources, you should seek competent legal counsel to advise you about the use of an irrevocable trust to preserve what you worked so hard for.

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