As an elder law and estate planning attorney with over 18 years of experience, I try to remind clients that there is a method to the madness for some of the planning solutions that we present in our office. The plans that we develop for clients are like tools in a toolbox. We don’t always know how we will have to use them, but they will be very helpful to have no matter the situation. Good tools make the job easier, and without them, the problems only become more difficult to solve. But not all tools are right for every job.

We like to break the planning process into three specific areas.

  1. Probate While You’re Alive

This aspect of your planning consists of making sure you have documents in place that name someone who can make decisions for you if you are incapacitated. Without this advance planning, the only option is to go to probate court and ask a judge to appoint someone as your guardian or conservator. This is often an expensive, lengthy public process. It’s much easier to have this planning done ahead of time to spare your loved ones the cost and headache. We refer to these documents as your living documents because they are designed to be used while you’re alive.

Your “Living Docs”

Power of Attorney (POA): This document governs who can make banking and financial decisions for you if you are unable to do so for yourself. We also recommend that you name a back-up in case something happens to the primary person you name. Without a valid POA, your loved ones would need to file in probate court to have someone named as your conservator.

Health Care Proxy (HCP): This document names who could make medical decisions for you if you cannot make them for yourself. The job of the HCP is to make the choices they believe you would make. Their decision should reflect what you want, even if it is not what they want.

Living Will: A living will provides your HCP with directions for your care in the event that you are in a persistent vegetative state. For many people, that means that they do not want to be hooked up to every machine under the sun. Rather, they would prefer what are known as “care and comfort measures.”

The living will is designed to inform your Health Care Proxy of your wishes so that they don’t spend the rest of their life questioning if they “made the right call.”

HIPPA Authorization Form: This document generally communicates who has the ability to access your protected medical information. It can allow multiple people, including your HCP, to access medical information that can be used by your family to coordinate medical decisions.

  1. Probate When You Pass Away

This process covers the type of planning that most people are familiar with – what happens to your stuff if something happens to you. There are many ways that you can leave your belongings to loved ones. Whether or not your assets have to go through probate depends on what type of assets you own and how those assets are owned. Typically, IRAs, annuities, and life insurance have a named beneficiary, so they do not go through probate. Probate generally applies to assets you own in your name alone at your passing.

Will: The key thing to keep in mind when it comes to talking about your will is that it only applies to things you own in your name alone at your passing. For the most part, joint assets go to the surviving joint owner, life insurance and retirement accounts will go to the named beneficiary (assuming there is one). That bank account in your name alone with no joint owner and no named beneficiary, that account will have to go through probate, and the money in the account will pass according to your will. Own a piece of real estate in your name alone, that will have to go through probate and will pass according to your will. Life insurance and your retirement accounts will go to the named beneficiary and will not pass according to your will.

Trust: The easiest way to understand a trust is to think of it this way: You take the wishes that would normally go into your will (i.e., to all my kids equally) and you put those wishes, or directions, into your trust. Then, you put your assets into your trust. How do you do that? You change the registration on accounts or real property to the name of your trust.

If something happens to you, your back up trustee can show the bank your death certificate. After the bank hears of your passing, your back up or successor trustee will be put in charge. It becomes a “paper caper” between the trustee and the bank without any probate court involvement.

The purpose of probate is to establish who has the authority to decide what happens to your assets. If your bank account is in your name alone, the bank doesn’t know who has the authority to access the assets. However, if the account is in the name of the trust, the bank knows that the successor trustee is now in charge of the account and the funds inside. A trust just lines up this authority ahead of time, so we can skip the trip to probate court.

Do I Need a Will if I Have a Trust?

Regardless of if you already have a trust, we still recommend a will. It doesn’t have to be incredibly complex. You could simply elect to use the document to order that your assets be moved over to your trust, name the executor of your will, and a potential guardian for your children. This is typically referred to as a “pour over will.”

Your trust is a private document, and unless someone has some interest in your trust, (i.e., they are a beneficiary or a trustee) it is none of their business what your trust says. Your will, on the other hand, is a public document. As such, if you have to probate your estate, the will is available to anyone who wants to read it.

If you have a trust, your “pour over will” would likely provide little information regarding what your wishes are for how your estate is distributed.

Long Term Care

The third component to your plan is what separates estate planning attorneys from elder law attorneys. While estate planning lawyers are concerned with passing your assets to heirs, elder law lawyers are concerned about the same thing, with one important addition. Elder law attorneys ask the question: What happens when you get sick and need long term care?

1. Do nothing: Many people take this approach to their long term care planning. We call it “throwing the dice.”

The number of nursing home residents has remained relatively stable since 1985, but the cost of long term care in a nursing facility is still daunting. 65% of residents in a nursing home are supported by Medicaid, which covers 45% of the total nursing home bill. (Georgetown University Long-Term Care Financing Project, “National Spending for Long-Term Care” 2007)

Issues relating to long term care are becoming a greater concern due to the costs and the increased prevalence of dementia. Still, many people take the approach that they will “cross that bridge if and when they come to it.” Doing nothing is a choice, and it’s taking a chance.

2. LTC Insurance: Long term care insurance is a viable option for those who can afford it. It allows you to insure the cost of long term care to give you more control over how your long term care issues are paid for. Like most insurance, the plan is to do it using the insurance company’s money rather than your own.

There are many types of long term care insurance policies available, so it’s important to work with a reputable insurance agent to find the one that is appropriate for you. One type of policy that we see often is what’s known as a “hybrid policy.”

Hybrid policies usually have a few features that clients find appealing. You can use it like a typical long term care policy. However, it also has a life insurance benefit, meaning that if you don’t use the policy benefits, someone you name as beneficiary gets a death benefit that is slightly more than you paid for the policy. It also has a return of premium benefit, which means if you need the money back at some point in the future, the insurance company will return your premium.

Many of these hybrid policies require an up-front one-time payment, so it’s important to understand the financial implications of choosing a strategy like this.

3. Pre-plan to apply for Medicaid: Medicaid is the government funded program that pays for most long term care costs for residents of a long term nursing facility. Due to the cost of a nursing home, ($10,000 to $15,000 dollars a month depending on the facility and your location) most individuals cannot afford the cost alone. As a result, many people look to elder law attorneys to help them pre-plan for this possible expense by using Medicaid.

There are a number of rules that need to be followed regarding Medicaid eligibility. Many focus on assets, income, and look back periods that determine whether a person “gave assets away” in an effort to accelerate their Medicaid eligibility.

In many ways, Medicaid planning is just like the tax planning you do with your accountant or the retirement planning you do with your financial advisor. The government lays out the rules, and you can follow them to try and meet the eligibility guidelines or assume the cost of long term care on your own.

Many people will try to retitle or change the ownership of assets to start what is known as the “5 year look back.” Basically, this means that they try to give away assets in the hope that they will not need to apply for Medicaid within the next five years. In so doing, if and when they do apply, the gift they gave away more than five years ago will not be counted when adding up their assets to consider their eligibility for Medicaid.

Some people will use outright gifts to family members, and some people will gift assets to an irrevocable trust. The downside of a standard gift is the possibility that something happens to the person (divorce, death, creditor issues) and, if necessary, the gift cannot be returned within the five years if the situation calls for it. The benefit of using an irrevocable trust is that, while the assets can be considered a completed gift for Medicaid planning, the person making the gift can retain some control over the trust (i.e., the right to change the trustees). The key is that the person gifting the property cannot retain any control over the assets in the trust, and cannot in any way get the assets returned to them.

The decision over whether to reduce assets in anticipation of Medicaid is one that requires careful consideration and consultation with an attorney. We tell our clients that the key is balance and flexibility. You don’t want to impoverish yourself in an attempt to avoid long term care costs for a long term care event that may not happen. You don’t want to spend your days wishing you had access to your assets to live the way you dreamed of living in retirement because they are either all locked up or unavailable because you gave them all away worrying that you might go to a nursing home.

We like to approach planning with our clients from a “lifestyle perspective.” We start by asking:

  • What are your goals?
  • Do you want to give to your family now or after your passing?
  • Do you want to leave a legacy, and if so, what assets can we identify as legacy assets?
  • Can you afford to try and leave a legacy, or are all your assets going to be needed to fund your retirement?

Once we have a handle on how trying to protect your assets will affect your overall retirement planning, we can begin to put a plan in place that can accomplish those objectives: preserve, protect, pass on.

No matter what your goals are, the key is to start planning early. Align yourself with good advisors who can guide you through all the options available to you. Find financial advisors, tax specialists, and estate planning and elder law attorneys who can explain the issues in a way that makes sense to you and your family. Remember, you might be working with these professionals for a long time, so make sure it’s a fit that’s right for you, your future, and your legacy.