How Can I Protect My Assets in Retirement?

By Ellen L. Baker.

Ellen L. Baker

Like many people, you’ve probably worked hard, planned and saved over the years with the goal of living comfortably in retirement and perhaps leaving an inheritance for your children.

However, with the complexity of Medicaid rules and the ever-increasing costs of long-term care, there are important estate planning concepts you simply must know.

Here, McCabe & Mack LLP partner Ellen L. Baker touches on some key points to consider.

Q. We’ve all heard horror stories about how nursing home care can eat through a lifetime of retirement savings in a very short period of time. If I’m in retirement or nearing retirement age, how can I plan now to protect my assets later?

A. You might have heard of the five-year look-back rule. This means that when you are ready to apply for Medicaid for nursing home care, any gifts that you’ve made within the prior five years are considered to have been made for the purpose of qualifying for Medicaid. Gifts could be a gift to a trust, to charity, or to your spouse, children or another person.

Now, some people think that if you keep the gifts under the current gift tax annual exemption of $15,000, those gifts will not cause a period of ineligibility. However, the gift tax annual exclusion is purely a tax concept, meaning that if you give $15,000 or less per person per year, you don’t have to file a gift tax return.

Since the gift tax annual exclusion is not related to Medicaid eligibility, even gifts of less than $15,000 can give rise to a penalty period under the Medicaid five-year look-back rule.

Only a few types of gifts are exempt from the five-year look-back penalty, such as gifts between spouses, gifts to a disabled child, or the gift of a home to a caretaker child. (The caretaker child is a child who has lived with the parent for at least two years prior to the parent’s Medicaid application.)

For example, if a mother has a disabled child who is collecting social security disability, gifts can be made to the disabled child and the mother will immediately qualify for Medicaid, without the five-year look-back period affecting eligibility. (There are a few other types of exempt gifts, but these are the most common.)

Q. The five-year look-back has huge implications for people’s retirement planning, as well as their charitable giving. If you don’t know the rules, you could find yourself in a bind, should you need nursing home care unexpectedly.

A. That’s right. Again, any gift made within five years is presumed to be made in order to qualify for Medicaid. For many years, it was a three-year look-back period, however it has been five-year look-back period since 2006.

That presumption can be rebutted with the proper evidence. If you can demonstrate consistent annual gifts to a charity or a child over many years, documented with a proper paper trail, and certainly before you became ill, there could be a chance of rebutting the presumption, as long as you continue to make those gifts in the same pattern.

Typically, at least locally, they only look at gifts that are $2,000 or more, but it is different in every county. And they usually don’t look at lower-value birthday or Christmas gifts.

In some cases, you can rebut the presumption during the application process. Other times they’ll deny Medicaid and you’ll have to go to a fair hearing and present the evidence.

Q. People often have some idea that perhaps they should create a trust. But if a trust also is a form of a gift, how do you protect your assets should you become ill, especially if you are in your 70s or older?

A. It really comes down to a person’s net worth. Some people may never have to apply for Medicaid, because they have long-term care insurance or enough resources to pay for their own care.

Others can retain enough resources to pay for five years of nursing home care and gift the balance to their families, and so they would not need to worry about the Medicaid five-year look-back period.

Otherwise, I would say the sooner people make their gifts to a trust, the better.

Q. So if you’re going to create a trust, or make significant philanthropic gifts from your current assets, it’s probably better to do so when you’re in your 60s or 70s and healthy, rather than in your 80s or 90s, when your health may be unpredictable or declining.

A. Yes, but again, it depends upon your financial situation and resources. If you think you will need Medicaid to pay for your long-term care, you will want to protect your assets by creating an irrevocable income-only trust.

When creating such a trust, you retain the rights only to the income from the trust – your trustee, who could be a child, or a trusted advisor – manages the rest of the decisions, although you may provide input. The trustee cannot give you any of the trust principal. If the trustee has the right to do so, the assets will be deemed available to pay for your care. Your trustee may make gifts to charity or to other family members from the trust as long as your trust is set up to allow for such gifts.

When considering a trust, it is important to weigh the benefits of protecting assets against your need to control the assets. You can’t take everything you own and put into the trust because you need to live your life and maintain your desired standard of living.

Many people put their home into the trust, since that’s not usually a source of funds for daily living. However, if you’re dependent upon cash from a home equity line of credit, or think you may need a reverse mortgage someday, a trust would not be a good choice for you.

Q. What about gifting your house to your children?

A. It depends on what your heirs intend to do with the house. Gifting your house may not be a favorable tax strategy because the price you paid for your house years ago (plus the cost of any capital improvements) becomes the cost basis for the person receiving the property – which then becomes a tax liability if they plan to sell the property right away. However, if the home becomes their primary residence, then they may be able to receive advantage of the capital gain exclusion for a primary residence.

And one of the advantages of a trust is that when you put the house in a properly drafted irrevocable trust, the creator of the trust can live in the house for life. When the trust creator dies, the property gets a step-up in cost basis to the value of the house at the owner’s death, which is better for the heirs from a tax perspective.

The same is true for stocks and other investments. For example, a client might say, “I have this IBM stock that I bought many years ago with a very low cost basis, which I never intend to sell. I have other resources that I’m using to live comfortably.” By putting the IBM stock in the trust, the client will continue to receive the dividends for life. And, like the house, upon death, the stock would get a step-up in cost basis.

Q. Outside of a trust and/or Medicaid, what are some other ways to ensure that I will have the care I need later in life, without using all my assets to pay for long-term care?

A. You could purchase long-term care insurance or explore new hybrid life insurance policies that will pay out for long term care.

The benefit of a life insurance policy is that even if you don’t go into a nursing home, your family will receive the funds from the life insurance policy upon your death. With long-term care insurance, you can pay premiums for many years, and if you never need a nursing home, the money’s gone. At least with the life insurance, it will be a benefit to your family.

Q. The key takeaway: If I’m getting close to retirement age (or already in retirement) and may need Medicaid to pay for nursing home later in life, I need to get a trust established now, while I’m healthy, correct?

A. Yes, absolutely. Because when people ask, “When should I do this?”, the answer is always, “At least five years before you enter a nursing home.” Who’s to know when that’s going to be?

Now, some people might say, “Well, I never want to go into a nursing home.” But you just don’t know what’s going to happen. While it is possible that you may be able to stay in your home, you still may need Community Medicaid to pay for home care, physical therapy, prescription drugs, and transportation to and from doctor appointments.

With Community Medicaid, there is no five-year look-back period. However, an attorney cannot guarantee how many hours of care you can receive at home, because that is a medical determination, not a legal determination. You want to be prepared in the event that nursing home care is required later.

Q. This information is so important. What steps do you suggest for people who haven’t taken care of their basic estate planning, such as their will, health care proxy, power of attorney, and trust?

A. Do it now! It is a terribly sad situation when a person become seriously ill, or even dies without having taken care of these important tasks in advance. It is so difficult for your spouse and children when they are required to deal with complicated Medicaid rules when you are ill. It is even worse when they must navigate while they are grieving the length of time, expense and public exposure of your financial affairs if your estate must go through probate.

Many times, people delay because they don’t want to think about the possibility of future illness or their death. I always ask, “Wouldn’t you want to make things easier for your family, and ensure that your wishes are followed?”

Other times, people avoid planning and seeing an attorney because they’re concerned about the cost. Depending upon the person’s situation, it could cost less or more. The real question you should be asking is, “How much more of my retirement savings and assets could I enjoy and pass on to my heirs by doing the proper estate planning in advance?”

We treat every situation individually – we never do one-size-fits-all. Rather we look at your situation and your wishes to ensure your interests are protected.

Q. If “now” is always the right time to do estate planning, is it ever too late?

A. This is important to remember – even if you or a loved one is on the brink of entering a nursing home, it may not be too late to do some planning. We may be able to help you protect some of your assets.

Also, when someone is in a nursing home, their retirement accounts have a certain amount of protection. When an individual goes into a nursing home, or they need community Medicaid at home, their retirement accounts are put into what is called “maximum payment status”. This is a monthly payment that amounts to somewhat more than the Required Minimum Distribution mandated by the IRS based on life expectancy.

So, for example: If a person’s life expectancy is 10 years according to the IRS life expectancy table, and they’re in a nursing home for two years out of that 10, and then they die, the balance of their IRA will revert to their beneficiary – not the nursing home, and not the state.

Q. Can you say more about how an irrevocable trust works? The word “irrevocable” probably scares people.

A. When you create a trust, you need a trustee. The trustee, often a child or a trusted advisor, cannot be the grantor or the creator of the trust. And, a trust means you have to trust who you’re appointing – that’s why it’s called a trust. Irrevocable means that you can’t control or get back the assets you put in the trust.

So when people create a trust, what they’re really asking themselves is, “If I do go into a nursing home, how will the rest of my money be spent? Am I comfortable with what my spouse, children or other beneficiaries are going to inherit?” And then from there, once you understand that, then you can make your plans.

Some people come into the office and say, “Hey, my children have more money than I do. They don’t need any of my money. And I think it’s my obligation to pay for my own care. I don’t believe in letting the government pay for it, because when the government’s paying for it, it means all the taxpayers are paying for it.” For them, it’s really a moral issue. They want to be responsible for paying for their own care.

Other people have children with great needs, and they want to make sure their children receive as much as possible from their estate so that they can survive.

Most people fall somewhere in between those two extremes. Every person’s situation is different, and every family is different. My job is to really listen to people, ask them questions, and to understand their goals and what’s important to them. And then make sure that their estate plan meets all their personal beliefs and wishes.

Q. Clearly it’s important to create the trust when you’re healthy. Is it ever too early to create a trust?

A. The person who is 65 and just retiring probably isn’t quite ready to create a trust, but they’re ready for information and to begin thinking about it. Often, when you first retire, you’re in a new phase of life and trying to figure out, “What do I do now? How much money do I need now that I am no longer receiving a paycheck?”

After a certain point, people begin to think, “Ok, we’re living very comfortably in retirement, we’re actually saving money. We’re not spending all our income. We can afford to do this.”

Q. So there’s a psychological shift in thinking that takes place starting from retirement at age 65, and then as people progress to 70 or 75.

A. That’s right. Retirement is a big life change and often people are more than a little apprehensive. They may think, “Will I be okay with less than I used to make?” And once they find out that they are, then they’re prepared to take steps toward asset protection.

The psychology is very interesting – we’re talking about people who have assets because they’ve saved all their lives. And now, we’re suggesting they give it away!

Hence, the word trust again. As people age, they need to be prepared to give up some control at a time when they may be giving up control of a lot of things.

I always say that there’s a sweet spot between when you’re ready to start giving up control – and before you become too old to give up control.

At a certain point in life, we’re holding on to whatever control we have precisely because we’re losing control of other things. Our body may no longer do what we want it to do, and we may not be able to drive anymore, which is very difficult. And then, if someone says we should no longer control our investments and instead put them in a trust, that’s even more difficult.

It’s better when you make the decision about when to create the trust. Look for the sweet spot between when you’re prepared to do it and before you can no longer make the decision yourself. Your greatest ability to control your hard-earned assets and the distribution of your assets is when you make the choice to give up control at the right time for you and your family.  

Be sure to consult with your tax and legal advisors to determine which charitable giving and estate planning options are best for your situation. If you have questions or would like to learn more about various charitable options or update your estate plans, please call us at McCabe & Mack LLP. We would be pleased to help you.

If you have any questions, please feel free to reach out to me personally at 845-486-6850 or by email.

Ellen L. Baker, a partner with McCabe & Mack LLP, is a graduate of Union College and Albany Law School of Union University. She has more than two decades of experience helping clients with their estate planning, estate and trust administration and elder law needs. A member of the National Academy of Elder Law Attorneys and the Hudson Valley Estate Planning Council, she also serves as a board member with the Community Foundations of the Hudson Valley, the Dutchess Community College Foundation, and as a Lifetime Honorary Member of the Anderson Center for Autism/Anderson Center Services. She is a member of the Poughkeepsie/Arlington Rotary Club.

Ellen and her husband Jim reside in Poughkeepsie. They have three grown children and a beautiful grandson. In her free time, Ellen enjoys reading and traveling.