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It’s time to implement old tactics to fight new costs
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It’s time to implement old tactics to fight new costs

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Dear Michael: Like many people in our area, we too have a life estate with our children as residual deed owners. We completed this in 2012 and were told we had to stay out of the nursing home for five years and then we would be okay – that the only thing that could be used against us would be the income generated from our property. Our income is pretty substantial at over $100,000 per year, so we should be okay, shouldn’t we?

– Five Years Gone.

Dear Five Years Gone: Like many people, you assumed you were out of the woods on your life estate transfer.

Your statement about receiving more than $100,000 per year and having enough for long-term care costs might be right – if all you need is assisted living. Those costs are right about $68,000-$80,000 per year.

The problem with this assumption is if one of you are in the facility and the other one is out, the one who is on the outside is going to have to figure out how to live on about $30,000 per year because the rest is going to costs of care, real estate taxes and income taxes.

I promised you some ways to deal with this life estate crisis. We’ve talked about irrevocable trusts – moving your life estate interest to such a trust – and how easy these trusts are to pierce by Medicaid if you make one of your children the trustee. We talked about irrevocable trusts being unchangeable once begun so if life situations change with yourself or your beneficiaries of the trust, you cannot change the trust.

I have never met anyone alive who likes irrevocable trusts for themselves although they do work well if you die and leave your property there.

We talked about setting up an LLC, but then we run into problems with the shares that you still own are still subject to accounting by Medicaid for eligibility.

If you give away most of the shares, then the income derived from the property will go to each shareholder in amounts equal to the percentage of the shares they own. In order to do something meaningful for long-term care purposes and Medicaid, you’d have to make yourself a pauper now.

So, let’s go back to the life estate and compare it to other methods. One, by age 77, 50 percent of the property is shielded from Medicaid. That’s not nothing!

Two, if you have a “qualified” long-term care policy issued – one you can deduct from your federal taxes and receive a credit from the state – the amount you are insured for is deducted from the 50 percent calculation. This is good for smaller farms and ranches – but most bigger operations don’t have sufficient long-term care amounts when they start considering operations over $1 million in value.

The bad news is, during the COVID-19 situation, all insurance companies have stopped issuing long-term care insurance for anyone over the age of 70 until the crisis is over. If you waited to buy long-term care insurance and your past 69, you can’t get it – period.

Perhaps it’s time to think of these possible costs the way we used to deal with estate taxes when the exemption was only $300,000 or so and many more people were affected by estate taxes. This long-term care cost is a function of people living too long and the value of their property getting too high – much like estate taxes.

Back then, less than five percent of people ever had to worry about estate taxes, but long-term care? Almost one in five (roughly 20 percent) will spend as long as five years in a facility. In a married couple, there is an 80 percent chance one of you will need care for this long.

We never had this type of bad odds with estate taxes – with costs affecting more than 45 percent of the people. Long-term care costs are becoming just as inevitable for most people as death and taxes. As such, it’s time to bring out some old solutions on estate taxes and use them for long-term care costs.

Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at KeeptheFamilyFarm@gmail.com.

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