More people who anticipate being in nursing homes someday are turning to Medicaid trusts to protect their homes and investments--as well as their children's assets--from being used to pay for the care.
A growing number of middle-class Americans are waking up to the fact that paying for expensive long-term nursing care could be financially devastating for their spouses or children.
Facing this nightmare scenario, people in their 50s and 60s are turning to financial advisers for help in laying the groundwork to create a Medicaid trust.
Advisers may recommend an attorney specializing in elder law who can set up the trust into which a client transfers some or all of his assets. As a result, the federal government deems the client a poor person who can qualify for Medicaid--a program designed to help low-income and disabled individuals.
"The trusts have become more popular--that's an awful lot of Middle America affected by the high cost of nursing-home care," said Robert M. Geurden, a partner at law firm Brier & Geurden in Needham, Mass.
Colorado adviser William Van Keulen has talked about a Medicaid trust with a couple in their 60s concerned about their long-term care needs. They have $1.1 million in IRA assets and a residence worth $300,000. Mr. Van Keulen recommended they use the trust along with long-term-care insurance.
For couples with less than $1.5 million in assets, he said, the goal is to avoid impoverishing the healthy spouse when care is needed for the ailing one.
"This is especially critical early in retirement when the survivor can be facing multiple years of living at poverty level," said Mr. Van Keulen, an adviser at Carnick & Kubik, a firm in Greenwood Village, Colo. with around $280 million under management.
Starting next year, eligibility rules for Medicaid change under the Affordable Care Act of 2010. In 2014, they will no longer be based on assets for those under 65, but on income.
Using long-term-care insurance along with a trust is a common strategy, according to Howard S. Krooks, an attorney at Elder Law Associates in Boca Raton, Fla. Insurance can cover any costs that come up during the five years that must pass between when a trust is drafted and the person can qualify for Medicaid. The period is known as the Medicaid look-back.
A pre-existing condition often keeps older people from qualifying for insurance, another reason to make plans earlier. Nonetheless, some people turn to an insurance-trust strategy late in life.
New Jersey adviser Eve Kaplan helped two clients, a son and his 82-year-old father, with a Medicaid trust after the younger man asked her to review the senior's financial documents. She saw that the father could easily deplete his entire estate--about $700,000--if he needed nursing-home care later in life.
Ms. Kaplan put the two in touch with an insurance agent, who arranged long-term-care insurance for the father. An attorney Ms. Kaplan recommended is drafting the trust. It will name the son and his sibling as heirs, and hold half of the father's assets, which are chiefly investments because he sold his house and lives in an apartment.
Medicaid trusts, the most common are irrevocable, are tricky to draft properly. Advisers recommend getting an attorney who specializes in elder law who knows the ins and out of federal Medicaid rules, and understands differences in states' Medicaid rules, which play a big part.
The trusts also have strict rules that are easy enough to stumble over once they have been drafted.
In one case Mr. Krooks recounted, a daughter made an error with a trust for her father that forced him to wait longer to qualify for Medicaid. About a year and a half after the trust was set up, her mother died. In tapping the trust to pay for her mother's funeral, the woman was convinced by the bank to take the money out in her father's name. That broke a rule that a Medicaid recipient can't take principal from the trust. The father had to wait another five years for Medicaid.
"She got confused and listened to the bank, when she should have picked up the phone to the attorney," said Mr. Krooks.
A Medicaid trust means giving up control of the assets that goes into it. A trust that holds a home, for example, can be written so the person can still live in it but the property is actually owned by the trust. A bank account in a trust is controlled by the trustee.
That lack of control is important to understand, said Gary E.D. Alt, a partner at Monterey Private Wealth, an advisory firm in Monterey, Calif., with about $240 million under management. Mr. Alt said he stresses this lack of control whenever he talks about the trusts with clients.