Long-Term Care Planning, Part 2 – Your Funding Options

The first part of planning for long-term care is realizing that, a) most of us will need this kind of care for at least some time before we die and b) the cost of this care can be financially devastating for a family if it is not planned for in advance. This was covered in Long-Term Care Planning, Part 1.

The next part is determining how you will pay for long-term care that may be needed for you, your spouse or another family member.

The Key Takeaways
• Long-term care is not covered by health insurance, disability insurance or Medicare.
• You have limited options when considering how these expenses could be paid.
• The best way to plan for the possible expense of long-term care is to accept it as a central requirement in your overall financial planning and seek professional assistance.

Who Pays for Long-Term Care?
Many people are surprised to learn that long-term care is not covered by health insurance, disability income insurance or Medicare. Health insurance plans cover nursing home expenses only for a short period of time while you are recovering from an illness or injury. Disability income insurance will replace part of your income if you are not able to work after a specified time, but does not pay for long-term care. Medicare, which covers most people over age 65, provides limited coverage for skilled care for up to 100 days immediately following hospitalization. After that, you’re on your own.

How Will You Pay for Long-Term Care if Needed?
1. Use your own assets. This is called self-insuring. If you need long-term care, you will pay for it from your own assets. If you don’t need the care, then you will not have spent money on insurance premiums. You can set aside a certain amount of your assets for this specific purpose or have the expenses paid from a general investment fund. Your financial advisor will be able to help you make that decision, determine how much you might need, and help you attain your goal through investments.

2. Buy long-term care insurance. This has traditionally been a good option, especially if you have assets and income you want to protect, you want to avoid being a financial burden on others, and you want to have some choice in the care you receive. Most policies give you the option of receiving care in your own home or in a private-pay facility. As with any insurance, the premiums are lower when you are younger and in good health; if you wait too long, the cost could be prohibitive and you might not qualify. In recent years, the premiums have gone up on these policies because the insurance companies under-estimated the actual costs. Your insurance advisor will be able to help you evaluate current policies and determine if one is right for you.

3. Purchase life insurance and annuities with long-term care benefits. Some life insurance policies have accelerated death benefits that will pay benefits if the insured has a care issue, as do some annuity products. The premiums for these will be higher, but they may be worth exploring. Your insurance advisor will be able to help you evaluate these options.

4. Qualify for Medicaid. Medicaid pays the bills for a large number of people in nursing homes today. But because the program is designed to provide services for those who cannot support themselves (children, the disabled, the poor), you will have to “spend down” your assets and be practically penniless in order to qualify for benefits. Your spouse will also be limited to the amount of assets and income he or she can have, and you will only be able to receive care from a facility that accepts Medicaid. (Most people would prefer to receive care at home or in a private-pay facility.)

If you have minimal assets, this may be an option for you. However, before you do anything, speak with a local elder law attorney who has experience with Medicaid planning. Medicaid, while a federal program, is administered by the states, so the rules vary from state to state. An innocent error could disqualify you from receiving benefits for many months.

Explore a Medicaid Trust. When properly prepared, these irrevocable trusts can help some people qualify for Medicaid without impoverishing the well spouse or spending the children’s inheritance. Five years must pass between the time assets are transferred to the trust and when the person is deemed eligible for Medicaid. This is known as the “look-back period.” Long-term care insurance is often used to cover the look-back period if care is needed before qualifying for Medicaid. Assistance from a local elder law attorney who has extensive experience with these trusts is absolutely essential.

What You Need to Know: The benefit of planning for the possible costs of long-term care is the peace of mind that comes from knowing that this care can be provided if needed without destroying the financial well-being of the entire family.

Actions to Consider
• Find out the costs for long-term care in your area. Your professional advisors (financial, attorney, insurance) will be able to give you some parameters.
• Talk with your spouse about the kind of long-term care you would each like to receive if that time comes. Do you want to stay in your home? Do you want to be in an assisted-living facility together for as long as possible?
• Talk with your advisors (financial, attorney, insurance) about your options and make an educated decision that is right for you.
• Let other family members know about your decisions and your plans. This will let them know your wishes, what they will need to do, and whom to contact. It will also give them peace of mind.

Long-Term Care Planning, Part 1 – A Central Requirement

Health care has been the topic of discussion lately, but the greatest threat to your financial health is long-term care. This is the kind of care you need if you are not able to perform normal daily activities (such as eating, dressing, bathing and toileting) without help, and it is expected that you will need this help for an extended period of time, often for the rest of your life.

Long-term care is often needed due to aging, chronic illness or injury, and with people living longer, most of us will need it for at least some time before we die. But it is not just for the elderly—a good number of younger, working-age adults are currently receiving long-term care due to accident, illness or injury.

The Key Takeaways
• The cost of long-term care is the greatest threat to your financial health.
• Most of us will need long-term care for at least some time before we die.
• It is better to assume you will need long-term care and plan for it than to just hope it doesn’t happen to you or a family member.

The Expense of Long-Term Care
Long-term care can be provided in your home, in an assisted living facility or in a nursing home. All can become very expensive over time.

For example, home health care can easily run over $20,000 per year—that’s at $16 per hour for just 25 hours per week. Depending on the skill required, number of hours needed and where you live, it can cost considerably more.

Assisted living facilities can cost more than $25,000 per year. Here, everything is a la carte—the more services you need, the higher the cost. Nursing home facilities, with round-the-clock care, are $50,000 or more a year.

Costs for long-term care are hard to estimate. The average stay in a nursing home is three years; patients with Alzheimer’s usually need care longer, often in specialized facilities. Again, the actual costs will depend on the kind of care you need, how long you require it and where you live. Expect these costs to increase as the cost of medical care, in general, continues to rise.

What You Need to Know: Long-term care expenses are not covered by health insurance, disability income insurance or Medicare. If you do not plan for these costs, and you or another family member requires long-term care, the results can be financially devastating for your family.

Actions to Consider
• Find out what costs are for long-term care in your area. Your financial and/or insurance advisor will be able to give you some parameters. You can also ask friends and neighbors; you probably know someone who has a family member receiving care at home or in a facility.
• Have an honest discussion with your spouse (and possibly other family members) about these costs and your desires about long-term care, should you need it. Most people want to stay in their homes. Find out what it would cost to make that happen—renovations to your home, home health care, etc.
• The next step is to start planning how to handle these costs, which will be addressed in Part 2.

Personal Risk Management, Part 2: Using Trusts in Estate Planning

Paying insurance premiums to protect against potential losses frees us mentally to enjoy driving a car, leave our house empty while on vacation and receive medical treatment for an injury or illness. In the same way, the use of trusts acts like insurance and can shift anxiety to comfort, turmoil to peace, and complexity to understanding.

The Key Takeaways
• Trusts provide a protective cure for many of the financial anxieties, concerns, frustrations and hassles we fear for ourselves and loved ones.
• Trusts also provide similar assurances for business owners and for those with considerable assets.
• The benefit of planning is peace of mind for you and your family now.

What Are Risks Related to Estate Planning?
Proper estate planning can protect you against awful things that can happen to you, your family and your assets. These can include: a costly and public court guardianship/conservatorship if you or your spouse becomes incapacitated; being kept in a vegetative state; a potentially costly and time consuming probate process after you die; federal and state estate taxes; a will contest or heirs fighting over your assets; your surviving spouse not having enough money to live on; irresponsible spending by a beneficiary; an inheritance becoming part of a beneficiary’s divorce proceedings; an inheritance not making it to the intended beneficiary (i.e., left to an adult for the benefit of a minor); and an inheritance not being used according to your values and beliefs.

What You Need to Know: Not addressing these risks can cause you pain, worry, frustration, anxiety, fear and anguish. And, if any of these awful things should happen to you or a loved one, your quality of life can suffer.

Why Use Trusts for Your Broader Financial and Wealth Planning?
There are many different trusts that can be used to address a wide range of your circumstances, needs, anxieties, and aspirations. Take a simple but important example of trusts’ capabilities: the living trust. Most people want to avoid court interference at incapacity (i.e., disability) and at death, and a living trust solves this worry. When you establish a living trust, you transfer your assets to it and select someone to step in and manage them for you when you are not able to do so. Because the assets are no longer in your name, the court has no reason to get involved at either incapacity or death; your successor can manage your assets according to your instructions for as long as necessary.

More broadly, trusts can hold investments, property and insurance policies, with benefits of reducing various taxes and protecting your wealth from lawsuits and creditors. A trust can continue beyond your lifetime—assets can be kept in a trust until your beneficiaries reach the age(s) you want them to inherit, to provide for a loved one with special needs, or to protect an inheritance from beneficiaries’ creditors, spouses and future death taxes. A trust will also let you provide for your surviving spouse without disinheriting your children.

What You Need to Know: Trusts, in their various forms, offer you a robust package of dollar and quality-of-life benefits. And, trusts are fully compatible with your various investments and assets, from mutual funds to stocks (both public and private) to insurance policies to property.

Actions to Consider
• Become aware of the financial, wealth and estate planning risks you and your family face, and how they can be managed or completely avoided with the use of trusts.
o An advisor and trust/estate planning attorney will be able to help you become an informed consumer.
• List the fears and anxieties you have for yourself and your loved ones concerning your wealth.
• Compare the costs associated with planning and implementation to the financial and emotional value you will receive.
o Keep in mind that while trusts have set-up costs, overall costs can be less over time by avoiding court expenses and delays, saving on a variety of taxes, eliminating exposure to legal costs, and so forth.
• Life insurance inside a trust is an excellent way to provide a larger inheritance for your loved ones.
• If you are a business owner, investigate the many benefits that trusts can provide for your business wealth.
• Don’t procrastinate. Trusts have as much application for the living as for those who pass on. Put your plan into effect now based on your current circumstances, and then make changes as needed. Acting now will give you the peace of mind you desire.

How to Choose a Trustee

When you establish a trust, you name someone to be the trustee. A trustee basically does what you do right now with your financial affairs—collect income, pay bills and taxes, save and invest for the future, buy and sell assets, provide for your loved ones, keep accurate records and generally keep things organized and in good order.

The Key Takeaways
• You can be trustee of your revocable living trust. If you are married, your spouse can be co-trustee.
• Most irrevocable trusts do not allow you to be trustee.
• Even though you may be allowed to be your own trustee, you may not be the best choice.
• You can also choose an adult child, trusted friend or a professional or corporate trustee.
• Naming someone else to be co-trustee with you helps them become familiar with your trust, allows them to learn firsthand how you want the trust to operate, and lets you evaluate the co-trustee’s abilities.

Who Can Be Your Trustee
If you have a revocable living trust, you can be your own trustee. If you are married, your spouse can be trustee with you. This way, if either of you become incapacitated or die, the other can continue to handle your financial affairs without interruption. Most married couples who own assets together, especially those who have been married for some time, are usually co-trustees.

You don’t have to be your own trustee. Some people choose an adult son or daughter, a trusted friend or another relative. Some like having the experience and investment skills of a professional or corporate trustee (e.g., a bank trust department or trust company). Naming someone else as trustee or co-trustee with you does not mean you lose control. The trustee you name must follow the instructions in your trust and report to you. You can even replace your trustee should you change your mind.

When to Consider a Professional or Corporate Trustee
You may be elderly, widowed, and/or in declining health and have no children or other trusted relatives living nearby. Or your candidates may not have the time or ability to manage your trust. You may simply not have the time, desire or experience to manage your investments by yourself. Also, certain irrevocable trusts will not allow you to be trustee. In these situations, a professional or corporate trustee may be exactly what you need: they have the experience, time and resources to manage your trust and help you meet your investment goals.

What You Need to Know
Professional or corporate trustees will charge a fee to manage your trust, but generally the fee it is quite reasonable, especially when you consider their experience, services provided and investment returns.

Actions to Consider
* Honestly evaluate if you are the best choice to be your own trustee. Someone else may truly do a better job than you, especially in managing your assets.
* Name someone to be co-trustee with you now. This would eliminate the time a successor would need to become knowledgeable about your trust, your assets, and the needs and personalities of your beneficiaries. It would also let you evaluate if the co-trustee is the right choice to manage the trust in your absence.
* Evaluate your trustee candidates carefully and realistically.
* If you are considering a professional or corporate trustee, talk to several. Compare their services, investment returns and fees.