Trusts, Nursing Home Care & Medi-Cal
Jun
21
Written by:
6/21/2010 10:53 PM
Living Trusts can Jeopardize Nursing Home Care
More and more these days “investment advisers” -- who may or may not be practicing law without a license -- are selling Trusts as vehicles for preventing probate delays and expenses, avoiding taxes and providing for estate management. Yet many of those marketing Trusts either do not recognize, or intentionally avoid discussing, a serious problem inherent in using Trusts in the context of an aging population: Trusts are a useful estate-planning tool but can have dire consequences when it comes to Long Term Nursing Home Care.
It is commonly believed that Trusts were created during the Middle Ages in England, and may have been around as early as the Roman Empire. Trusts were part of the Courts of Chancery of the 15th Century, although there are writings that include the concept as early as the 11th century. Historians and legal scholars have noted that Plato used a trust during the golden days of Greece.
Life during the Middle Ages was short and often brutal. The average life expectancy was about 35 years, and the average citizen had little to look forward to that did not in some way include some form of illness such as the plague or any of a variety of opportunistic diseases that roamed the land. Most people were likely to die quickly from disease, famine or warfare, and no one anticipated the need for long-term care. When medical care was available, it was relegated to a bare minimum, and the cure was as likely to cause death as the scourge the patient was trying to fend off.
In that lovely setting, trusts were used primarily to deal with taxes and debts that arose out of the feudal system. Trusts were often used as a creditor’s tool, making certain that the powers that be were protected and that all debts on the land were paid. Some scholars have argued that Trusts were used in an attempt to avoid debt and taxes to the feudal lords.
Modern-day Trusts are generally considered useful tools to avoid probate and taxes, or to manage the estate of an incompetent Trustor, amongst other goals. As a result, lawyers, paralegals, accountants, insurance agents, and other so-called investment advisers indiscriminately promote Trusts to large audiences as the estate-planning vehicle of choice without inquiring into or perhaps even recognizing the serious economic hardships that can arise for the Trustor and his or her family if the Trustor should suffer a serious illness and spend even a small amount of time in a Long-Term Care facility. Many of those same advisers fail to ask if illness is a real or potential risk for the settler or a spouse.
Approximately 40 million aging baby boomers soon will be receiving increasingly expensive medical care during a longer life expectancy than their ancestors. As they become ill with Cancer, Strokes, Alzheimer’s Disease, Parkinson’s Disease, Dementia and other debilitating illnesses, much of that care will be delivered in a Skilled Nursing Home setting. Nursing Home Care is a serious and expensive issue. The average stay at a Nursing Home can easily eat up $60,000 to $100,000 a year, and in some cases the Nursing Home stay can last up to 10 or more years.
With proper planning, much of the Nursing Home expenses can be paid for under the California Long-Term Medi-Cal program (the state equivalent of the federal Medicaid program), without impoverishing the patient’s spouse and without depleting the family estate. And here is where Trusts and traditional estate planning begin to clash with the need for affordable Skilled Nursing Home Care.
The “income and principal clause” in most of today’s Trusts obligates the Trustor or Trustee to take whatever steps are necessary to make certain that the Settlor is cared for. This clause can force a patient to use all Trust Assets unnecessarily to pay for healthcare until such time as the Trust is depleted. Assets held in a Revocable Trust at death are subject to an estate claim. The State Director of Health Services is entitled to reimbursement for Medi-Cal benefits paid to the patient after age 55. That Health Services claim takes priority over any other Trust terms for payments to beneficiaries, including spouses.
Advisors who advise families to consolidate resources into a Living Trust when long-term medical care is on the horizon should be particularly concerned. In addition to making qualification for long-term Medi-Cal more difficult, the Trust becomes a convenient source for reimbursement to Medi-Cal after the Trustor’s death. The “Remaindermen” later may well question the competence of the professional who advised the use of a Trust when the Trustor was already known to be suffering a serious illness and facing the need for long term Nursing Home Care that was not taken into consideration. Or, that there were other legitimate vehicles available that would have resulted in qualifying for Medi-Cal and completely avoiding later, a possibly devastating, Medi-Cal reimbursement claim.
As the Medi-Cal planning options become better known, their application in the estate-planning area will undoubtedly be considered the standard of care for professional estate planners. A failure to consider them, and a blind recommendation to use Living Trusts, could expose such planners to malpractice claims in the future, particularly when the Medi-Cal reimbursement claims start coming in.
Why is Medi-Cal even an issue here? Because as many people including lawyers are frequently unaware, the impoverished are not the only ones entitled to receive Medi-Cal. It is this misunderstanding of the Medi-Cal system that muddies today’s estate-planning issues. The truth is, Medi-Cal is not merely a poverty program. It is available to all long-term Nursing Home placements, as long as they comply with the applicable rules and regulations, which are complex and subject to frequent amendment.
Government officials, who feel the need to tightly control the shrinking pool of so-called government aid, argue that those with assets should use them to pay for their medical care instead of preserving an estate for heirs. But for those that understand the Medi-Cal system, that argument is without merit.
Take, for example, Social Security. Those who work the correct number of quarters and pay in to the system are entitled to Social Security upon retirement, no matter the amount of wealth they have accumulated. The Internal Revenue Service functions in a similar manner. Taxpayers earn money on which they pay taxes, but reimbursement is not automatic if the worker overpays. Taxpayers must do something affirmative – file tax returns – to make sure they receive what they are entitled to.
Medi-Cal is an entitlement. Those who know how to work within the system often can qualify for the benefit.
Estate planners who operate without knowledge or in complete disregard of the interplay between Federal or State Benefits and Living Trusts not only could block a critical source of revenue should their clients require Long-Term Nursing Home Care, but they also put at risk the very assets the family has put in Trust should the benefit be utilized. They have created a “lose-lose” situation.
Since Oct. 1, 1993, California has had the authority to place an Estate Claim against the property of a Medi-Cal beneficiary, including property that passes from the decedent to his or her heirs by way of a revocable living trust. This means that the value of those assets is viewed as cash available to privately pay the cost of a nursing home stay.
A Living Trust is not automatically compatible with effective estate planning for long-term illness and inheritance preservation. Living Trusts that are created without understanding and planning for Medi-Cal can and will interfere with a patient’s ability to rely on excellent, available government benefits. The Trust that a well-meaning lawyer created without considering illness could cause the client to lose the Trust Assets because of its very creation. (Although there are irrevocable trusts that can protect a home, they too have serious downsides that have become a topic of argument within the estate-planning community. Professionals have yet to reach a consensus about how well these trusts protect assets in a long-term-care situation.)
Investment advisers who target retirees as clients for estate planning involving Living Trusts without fully disclosing the implications for long-term-care payment are jeopardizing their clients’ financial security. The proliferation of “Living Trust seminars” currently popular are becoming the scourge of the estate-planning industry and something the legal profession should quickly join forces to end.
For further information on Trusts and Long Term Nursing Home Care contact Nursing Home Solutions at 800 773 6467.