This week on Make It Last, I cover how to protect your assets against nursing home and Medicaid spend-down. Most of you know that we help families every week to maintain flexibility and choice in their long-term care, and this episode will give you a peek under the hood of how that happens.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
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Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney, and certified financial planner.
Victor Medina: Hey, everybody, welcome back to Make It Last. I don’t know, what do you think about that new music? I’m enjoying it more and more. I got to tell you it’s a lot of fun to listen to, especially as I think about all my family in Puerto Rico that are struggling with the devastating effects of Hurricane Maria.
They are struggling to get back. I don’t want to start the show on a downer, but I do like to honor my culture and heritage, and I love listening to those Latin beats. I’m hoping that things turn around for them as soon as possible.
I am your host Victor Medina. This is Make it Last. We’re helping to keep your legal ducks in a row and your financial nest egg secure.
I’m excited, celebrating a little bit of a milestone here. This is the 26th show, which means that we have run the end of our first contract with WCTC and enjoying the opportunity to come back for another half year. Want to celebrate a little bit that the show will continue.
Those of you that have enjoyed listening to it and given your high praise for this show [laughs] to the radio station and your listenership on iTunes, I want to thank you very much for all of the nice things that you’ve said. We really enjoyed doing it.
I enjoy the opportunity to come and join you here for about half an hour, share a little bit about what I know, and hopefully make your day a little brighter, a little bit more informed, as we think about how to get through retirement planning and do it from a legal sense, do it from a financial sense, make sure everything is well positioned for you going forward.
I’m excited for this show. First, I want to take the first segment and talk a little bit about some stuff that’s going on personally that maybe you can help me with, educate you a little bit on some of that, and then we’re going to go to the main topic for today’s show, which is, “How we can use trusts to help protect assets from the devastating costs of long‑term care?”
In the past, I have talked a little bit about elder law generally and what long‑term care costs are, but didn’t focus a lot on the strategies. We’re going to take this opportunity as one of the hallmarks of how to make it last, which is how to protect your assets.
We want to make sure that we are really thinking about how to do that in a long‑term care setting as well, and make sure that the specific strategies, the things that we use every day, are things that we’re sharing with you and giving you the opportunity to go and get done on your own, whether with our law firm or someone else.
That’s going to occupy the next two segments. When we come back from the break, we’ll start on that, but I want to share a little bit personally some of the…I don’t know if the word struggle is the right word, but I’ve spent a lot of time over the last four or five months, really thinking about how to, I don’t know, position the name of the financial services firm that we have. Some of you know I run a law office, that’s Medina Law Group, and it’s been around for 10, 12 years now. I also run a financial services business.
I’m Certified Financial Planner and now have a designation as a Retirement Income Certified Professional or RICP. I got that one recently. What I wanted to do is unify those things. I spent the opportunity with one of my clients, a lunch meeting, one of our favorite clients, to go over why is it that they work with us.
Because we certainly think that we have a great offering but without talking to the client about that we don’t know really what they find attractive about it. Why is that they choose to work with us as opposed to anybody else and want to honor that a little bit by asking those questions and figuring that out.
We went through lunch. I went through an interview and I went through a list of questions and as these things do, it just grew organically. We got off of the script of the questions. We just [inaudible 3:43] to the conversation and when I ask them about…to define what it is that they like about us. What came out was the following.
They said, “Listen, one of the reasons why we choose to work with you is because you offer the opportunity to have that one place where we can get all our questions answered. That we feel confident that there’s somebody looking out for our best interests.”
He says, “As you get older, you’re looking for that one place to go. You’re looking for that one stop to unify. You want the faith that comes from someone you trust giving the answers that you need at the time.” I took that to heart. We do think about that. We are integrated. We are total full spectrum.
We help cover each of your financial, legal, and tax‑planning needs and that’s something that’s unique about us. There’s really very few attorneys that are qualified financial professionals and very few of those can also advise on tax. The fact that we can do all three of those things for our clients really puts us in a unique position for them.
That leaves me with the question about what to do with naming the firm. I’ve spent a lot of time thinking about this because I want something that’s very clear. I want something that’s regular words. [laughs] I don’t know how else to put it. I don’t want any fancy words on it.
I want that to be conveyed over as something that when you hear about it you’re like, “Oh, I get what they do.” I have been struggling with this as much as I’ve been wordsmithing it, as much as I go on and do a thesaurus and everything else, I can’t figure that out. I’m leaving it up to you…not up to you. I’m going to make the final decision but I’m asking for your help.
If you are listening to this show and you have some ideas about how we can better define what we do, send them in. You can send me an email personally at email@example.com and let me know what your thoughts are. I would love to hear it whether you’re a client of ours or you’re just somebody from the outside.
If you got a great idea, share it with us. To be very candid with you, it’s a stumbling block for me. I can’t get going on the next things that I want to do in building the business until I’ve solve this naming issue.
It sounds like it’s [inaudible 6:05] in terms of selecting the name, but for me, it helps define who we are and then it sets that course. Until I figure that out, I really don’t know what direction to go.
I love the logos that we use. In the Medina Law Group, we’ve got a tree and it’s called a flamboyant tree. It is from Puerto Rico. It is a tree that blooms red all the time. A lot of the times, we see the red color in autumn in the Northeast, but down in Puerto Rico, it blooms red all the time. That’s its natural state. That’s the tree, we have that forever.
On the financial side, if you look up Private Client Capital Group, you’ll see that one of the things that we have there is a…it looks like a lighthouse, but it’s not. It’s a guard tower.
It is a famous guard tower on the fort in old San Juan called El Morro, which is M‑O‑R‑R‑O. That guard tower juts out over the ocean. It basically sticks out over the walls and it’s there as a sanctuary to look out and to see anything that might come and attack.
I thought, “Wow, that’s a really powerful image for us as a financial advisor and a fiduciary,” because we’re really thinking about protecting our clients assets and to be that sanctuary, to be that person that sees the attack before it happens and helps protect the castle. That’s a good image for us. I like the logos a lot. I like the logos a lot.
I get to figure out the name. If you got any ideas, email me, firstname.lastname@example.org.
Now, I have spent one segment just talking about myself.
Victor: Let me come back from the break and give you something back for which I’m going to talk to you in real clear terms about how to use trust to help protect assets from long‑term care and the way those work. We’re going to open the [inaudible 7:47] a bit and show you the inner workings of that.
Hopefully, it will bring here education at the speed of long‑term care. Again, if you are interested in this, you should follow up with a qualified elder law attorney or somebody who is a professional here that can really put that stuff together. Join us when we come back from the break.
This is Make It Last and we will talk about trusts and long‑term care. We’ll be right back.
Victor: Welcome back to Make It Last. We’re to talk today about how you can use trust to help protect assets from long‑term care. Trusts, we have a little bit of refresher on that.
I will do a little bit refresher on long‑term care, and then I can talk to you specifically about the way this trust works. We’re going to jump right in. I hope you’ve had your coffee, got your thinking cap on. You might want to take notes on this stuff just so you really understand the way that it’s supposed to work.
In the world of long‑term care, there’s basically a few different ways that you can help pay for long‑term care if you don’t want to spend your own assets.
If you can’t qualify for a long‑term care policy, if you don’t want to spend your savings, if you don’t want your long‑term care needs, the fact that you got sick, to force impoverish your spouse, then you’ve got to do some planning ahead of time to help protect that.
There’s only a couple of different ways besides your money that you can pay for it. One is Medicaid, and the other is a VA. You want to be able to mix and match those options as the circumstances dictates. We’re trying to plan to qualify for those.
I suppose, take a moment and make sure that we’re clear that planning for this doesn’t mean ending up alone in a nursing home, destitute and poor because that’s a lot of people’s image from Medicaid. We’re looking to mix and match because, in New Jersey and in Pennsylvania, you can get Medicaid to pay for care in your home.
You’re going to be able to help get care in at that level and it’s good care, and then you can supplement that with your own money. We do want to think about this as being good care, and not something that’s a compromise when we’re there.
Next, let’s talk a little bit about trusts. Way back in episode one, two or three, I can’t even remember, it was so long ago, we talked about trusts. The analogy or story or picture that I like to use about that is a trust is nothing more than a bucket. It’s a container for stuff. Now, it holds your assets, and then it’s got all these instructions about it.
If you realize that it’s just a bucket, then you get pretty clear that you don’t have to be super wealthy to have one, that there’s value to organizing your affairs in a way that helps put them all in one bucket, and then you can do things with the assets that are in that bucket.
Different kinds of trusts ‑‑ revocable, irrevocable ‑‑ and when you are thinking about which kind to have, you should think about who you want to have access to that along the way.
With a revocable trust, you’re essentially making the bucket have no top on it. It’s an open‑top bucket. It is the best way we can extend that analogy. That means that you can reach in there any time you want, and by the way, it also means that Medicaid can reach in there, and the nursing home can reach in there.
An open‑top bucket is not a great trust to help protect assets from long‑term care.
We cannot use a revocable trust for your asset protection planning needs. If you listened to last week’s show, we talked about asset protection, we talked about different ways to shield those assets, similar principles. If you can access this stuff directly, it means that so can anyone else that wants you to use that money, whether it’s Medicaid or credit or whatever else.
We don’t want an open‑top bucket. We want a closed‑top bucket, which means we want the form of an irrevocable trust. At this point in time, my Nervous Nelly clients get nervous. [laughs]
Not all of them are named Nelly. I have one, but they get nervous because when I say irrevocable trust, in their mind, they say, “Well, that means that this stuff has to be assets that I give away forever and ever.”
We actually spend a little bit more time talking about how to design the trust so that it gains them the access that they need, when they need it, but also carries the protections.
That sounds like a lot of double talk because it sounds like you can’t do all of those things, but let’s break that down a little bit. If we create these trusts and we close the top on it, the act of closing the top on it is what makes it irrevocable.
What do we put in the bucket or what spigots, spouts, and trap‑doors, that’s not material to it being irrevocable. If we create a form of a trap‑door, it allows us to open it and return some of that money back to the client, then we have created some measure of control for them.
They’re not the people, who are directly in control, but they can be indirectly in control. Let’s keep working with this bucket analogy. Bucket has a handle, and we got to talk about who can carry the bucket.
On a revocable trust, that ends up being the person that created it. You, my client, comes in and you create a revocable trust, and the revocable trust is you can carry the bucket. With an irrevocable trust, I explain to you that if you want to protect these assets from Medicaid, you can’t carry the bucket.
You just can’t. It breaks the rules. If you carry the bucket and Medicaid says that’s your money, and therefore, you should spend it, and spend it all down before they help. That’s worthless.
We need somebody else to carry the bucket, but here’s the thing, here’s the reason why this planning works. We can build in some language that allows you, my client, to determine who can carry that bucket at any time.
You can reserve the right to create this bucket and say that this one person carries it, but at any time, I can replace that person and name somebody else.
That’s pretty powerful. Even though you’re restricted from carrying the bucket, if you can determine who carries the bucket, it gives you a lot of control in making sure that you have somebody there who will work with you as you need them to work with you.
Those kinds of provisions open up the flexibility much more than if we just gifted assets away and got them out of your name because you might say to me, “Well, Medina, that’s all well and good,” but rather than create these fancy trusts, why don’t I just take these assets, and I just give them to my kids?”
I’ll explain to you, but if you do that, then you’ve lost all control because if it’s in their name, you can’t control it any further than that. If they die, it’s going to go to your son‑in‑law, and he’s going to control your fate.
That’s not really going to work well, but if you create this trust that names your daughter in charge of it, and says, “OK, she can hold the handle, but if she doesn’t like my Thanksgiving dinner as well as I expected her, I can make a change on that and name somebody else.”
All of a sudden, you have a lot more control over the assets that you put inside of the trust. It is important to think through these provisions, because you want to name good people in charge, but you also want to know that you have the flexibility to change courses, if for some reason you need to and that’s a measure of actually creating control, not taking control away.
I know that’s complicated, and we went through that pretty quickly, but I need you to take out of this discussion the idea that, in creating these trusts, you are actually maintaining control in a way that you might not ordinarily be able to create control, if you simply just gifted these assets away.
Victor: First principle on the trust is it has to be irrevocable and somebody else has to be in charge.
When we come back from the break, I’m going to talk about some tax planning that goes into it, and how we return those assets to you. I’ll talk briefly about who would be a good person to name in charge of this, and what those rules are.
Stick with us, when we come back from the break, we’re going to talk about the practical applications of using trusts as part of a way to protect assets from long‑term care. Stick with us, and we’ll be right back.
Victor: Everybody, welcome back to Make It Last. We are talking about how to use trusts to help protect assets for long‑term care. I spent the last segment talking a little bit about the difference between revocable and irrevocable trusts, and why we have to use irrevocable trust in this planning.
A reminder, we need irrevocable trusts because we need a top on top of our bucket. We need a lid on the bucket to make sure that these assets are protected. We talked a little bit about how to create the provisions in there that help you determine who holds the bucket at any time, the ability to control that.
If you want to talk about technical terms, the person who’s in charge of the bucket is known as a trustee. Your ability to change the trustee is what gives you the control. A trustee is somebody who is a fiduciary. I know you heard me rail about fiduciaries or financial advisors and why you should have one.
In this term, the fiduciary is somebody who puts the best interest of the trust, the way it has been created, above their own. It’s an important role, but it’s not a role for somebody in a professional capacity.
They ask me all the time, “Do I need to name a lawyer or an accountant or a professional trustee, like a bank or trust company, in your setup?” I say, “No, not at all.” In fact, most of the time, what we do is we find a helper‑child to be in charge of the trust. We name them as trustee.
You’re going to be looking for that one person who has got two qualities that are super‑important. The first thing is we want them to be someone who is very trustworthy, because they’re going to have some control. We don’t want them to abuse that control. We don’t want to have to unring a bell later in the future. The first thing we want to do is we want them to be trustworthy.
The second is they’re going to need some financial savviness. They’re going to need to understand the difference between a good deal and a bad deal, because even though you will help them along while you’re alive and well, if something happens to you and you become incapacitated, you want somebody that you can trust.
They don’t have to be a financial savant. They don’t have to go and have all these financial degrees. They need to realize, “Hey, listen. I shouldn’t have all of my money in a really volatile stock for my parents who are 85 years old.” They need to understand that level of making those types of decisions, and then be able to push back if they’re working with a financial person that’s trying to not take care of that in the right way.
They need to have enough, I don’t know, gray matter to be able to recognize that and say, “No, no. That doesn’t really work,” especially if they’re working with somebody like us that is really looking out for their best interest. We want somebody in that role as a trustee. It’s usually a helper‑child.
The next question then becomes, “OK. How do I get my money back if I need to?” That’s part of the magic of the trust, because the trust is never going to say things like, “This is here so that I can use the money for my parent‑clients if they need it for long‑term care later.”
If I put that language inside of the trust, what do you think Medicaid’s going to do? They’re going to absolutely blow it up and say, “No, no. That’s not allowed. You can’t do that.” I definitely don’t want to include that type of language. I do want the ability for my children to return that money to the parents if they need to, out of a sense of a moral obligation to return that money.
What I do is set up that same helper‑child as in charge of the trust and somebody who can receive money from the trust. In that direct connection between having the same person in both roles, I have a little assurance that the person that I name in charge of the trust will actually receive the money. They can gift it back to me, if I’m the client, as I need to.
If I really want to put the protections in, what I do is I say, “OK. Well, I’m going to reserve for my client the right to make a switch on any of those roles at any time.” Not only can I change who holds the bucket, I can also change who receives the money out of the bucket. In that way, I have created a lot of control for my clients in the way that we’re using this trust, very effective planning that way.
I’ve got to put some restrictions in there. Some of them are technical about who the parents can name. They can never name themselves. We have to be really clear in the trust that we’re not using this to avoid spending these assets for Medicaid that are not available for that.
There are rules on that. Largely speaking, they work really well, these trusts, because we’re able to put these assets in a container, keep them protected, and give our clients the access to those assets as they need. That’s the metes and bounds of the way the trust is supposed to work.
The next thing I need to think about is taxes, because if all I’m doing is putting it into a trust, and I’m not paying attention to the taxes, I’m killing a fly with a sledgehammer. I want to be a little bit more nuanced than that. I want to give my clients a little better results than that.
I need to think about the tax planning on that. That brings me to a couple of technical terms or technical concepts on here. I don’t want to lose you, my faithful audience member, as I talk about this.
There’s a couple of toggle switches that I can put into the trust. I can toggle this trust so either you, my client, the person who is trying to protect the assets, as responsible for the taxes that go on in there, or I can toggle that the kids are responsible.
There are right ways to put that toggle, depending on the assets that I put in. For instance, if I’m going to put your home inside of the trust…You might have bought that home when it was $40,000, 1940. It’s worth $400,000 now. Those are a lot of embedded capital gains. I want you to retain the ability to exempt those capital gains, just like you could before you created this trust.
You might know that you can save $250,000 in capital gains per person every two years if you’ve been living in the home every two out of last five years. That’s called a “capital gains exemption,” what we call “Section 121 exemption.” We can use that exemption when you own it individually.
What I need to do with the trust is I need to write the language in there that allows you to use that same exemption, even though it’s trust‑owned. I can do that because I’m awesome at my job. [laughs]
I can do it because there’s a way of triggering income taxation in the way that we put the language in there. There’s a situation where I want to toggle it as an asset that is taxed for the original guarantor.
When I get to VA planning, VA looks at the income that you generate. If you have too much of that income, whether or not you’re actually using it, then you’re not eligible for the plan benefits that we have, the pension that they can pay out.
What I need to do there is I need to toggle the switch so that the kids are responsible for the taxes. When I say “responsible,” I don’t want the kids to get nervous here. I don’t want you to get nervous for the kids. It’s not going to be something that they have to pay with their own money.
When it comes to reporting these taxes and trying to figure out who is responsible for paying them, we want it to appear on the kid’s tax returns. We’ll give them the money so that they’re not out of pocket on what the taxes are.
To make our planning work, we want to make this income not appear on your tax records. That’s something that we can do again because I’m what? Awesome. I’m awesome. I’m awesome at what I do. We can set that trust up that way. We can make sure that toggle switch is appropriate.
In some cases, that means two or three different trusts, which shouldn’t really bother you as long as they all do the same thing. We might have one trust for the home. It does one thing. We might do one trust for the nest egg. The assets might be something else. Those are different ways to configure.
The other toggle switch I have has to do with the taxation when you die. When you pass away, normally, all of the gains that you put in your investment account in your home, they get erased. It’s called a “step‑up in basis.” Typically, you’re able to just bring those assets up in basis level and erase all of the capital gains taxes that are in there. That’s called a “state tax inclusion.”
I’m also able to toggle that switch as included or not. I want to be able to do that, depending on what the tax situation is going to be. If there’s a lot of embedded gains in there, I want to toggle it so that we erase those gains if you die.
At the same time, if there are not a lot of embedded gains and you live in a place like Pennsylvania, where there is a four‑and‑half percent inheritance tax on every dollar that you leave even to kids ‑‑ more if you’re going to leave it to somebody else than kids ‑‑ I might want to get that out of the estate. It takes me about a year of holding it in the trust to avoid it. If I do it correctly, I’m able to avoid those inheritance taxes.
Again, mixing and matching. This is why it’s really important work with a qualified elder law attorney that understands taxes and finances, because creating these trusts and figuring out what to fill them with is super‑important and can make or break, in tens of thousands of dollars, the success of your planning.
I want to spend these last couple of minutes really urging you to think about a few things. One, if you’re concerned about the rising costs of long‑term care and you want to make sure that your assets are protected, you have to get yourself in front of a qualified elder law attorney, because only somebody that is regularly working in this area can create the trusts that I’ve been talking about here today.
This is not an area for a dabbler. Just because a person did your home closing does not make them a qualified elder law attorney. This is an area where you can screw up [inaudible 26:54] and cost tens of thousands of dollars on there. You don’t want to have a misstep this late in life.
You do want to talk with somebody that does this day in and day out. To compare a little bit about what we do, we probably see maybe 200 clients a year. I might write a few hundred different trusts above that, just as the way that we can figure this for our clients. I’ve been doing that for years now.
This is all we do. This is the bread and butter of what our planning is. You need to be working with somebody like that. This can’t be somebody that just put the elder law on their website as though it was something that they just wanted to add. This needs to be in and out.
The sooner that you do it, the better that you will be positioned to help protect those assets. It should been done yesterday. We don’t want to wait till tomorrow. We want the opportunity to get in front of somebody who can help us with this ASAP, because the longer you wait, the greater chance it’s going to be that this doesn’t work out when we need it.
I hope that has been helpful for you, how to use trusts in helping to protect assets along the way. If you have any questions, certainly send them to email@example.com. Drop a comment in the website or iTunes. Leave us a great review if you’re interested in that.
I want to thank all of our listeners, because you guys made it possible for us to go 26 episodes so far, a good full half of the year, and then be renewed for the next year as well. I want to thank you for all that you’ve done to help make the show a success. I’ll ask you to keep doing that.
If you find the show to be helpful and something that is good for you, then share it with a friend, because if you find it helpful, I’m sure they’re going to find it helpful as well. They can do that by going to WCTC and listening to it live on 7:30 AM on Saturday mornings, or what you can do is you can subscribe on iTunes or on Android.
Just hit that Subscribe button. Each episode will be delivered to you. You can listen to it at your leisure. It’s 30 minutes of fun and excitement, like talking about trusts. [laughs] Thanks again for listening. Please help grow the listenership by sharing what you have.
Victor: That’s it. We will catch you next Saturday. This has been Make It Last, where we help keep your legal ducks in a row and your financial nest egg secure. We will catch you next Saturday. Take care. Bye‑bye.
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