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Are Irrevocable Asset Protection Trusts for Boomers?

Many times, as part of an asset protection plan (against long-term care costs), I will recommend to my senior clients that they consider establishing various types of irrevocable trusts.   The goal of these trusts are typically to place the assets outside the view of various public benefit programs (like Medicaid).   These trusts almost certainly involve giving up some level of control and access to the funds- but often make sense when staring down the prospect of needing care in the next few years.

At least monthly, I will be talking with the children of one of my clients who will remark that they want to set up an  irrevocable trust now so that they can get it done well before the 5 year lookback for Medicaid (Medicaid typically refuses to provide benefits for people who have given assets away to trusts or other people in the 5 years before application).   My standard answer is “No, you really don’t.”    When they ask why, my answer is typically centered around three reasons

1) The primary reason why the child wanted to do this was to be able to qualify for Medicaid in the future- but if they are unlikely to need nursing home care for the next 20+ years- who knows what Medicaid will look like- or if it will be here at all?

2)  The child has to give up control when they create this trust- do they really want to hand over control of their assets to their 20-30 year old children or others?

3)  We have to restrict the child’s access to these funds (even if we have a cooperative family)- what if they need this money for non-long term care expenses (like food or prescriptions)?

For most baby boomer children, a far better answer is to look at long-term care insurance.  Inevitably,  I will hear comments about how it’s too expensive, or they aren’t ever going to the nursing home (sometimes immediately after telling me they wanted an irrevocable trust to protect against the expenses of  that same nursing home!).   It is true that long term care insurance is not cheap.   But, there is a reason for that- long term care is extremely expensive!!   This means that if you don’t want to write a check that will likely be in excess of $20,000 per month by 2030 (just 18 years from now), the insurance company is going to have to charge more than $100/month to cover that risk.

Most people think of long-term care insurance as some type of luxury or just not very important. For most middle class families, I disagree- it is an absolute necessity! For married couples, the prospect of one needing long-term care can be absolutely devastating to the healthy spouse.   This will become even more prevalent for the baby boom generation, as so much of their investment assets are in retirement accounts (IRAs).   IRAs are a great tool to plan for retirement, but they are lousy assets to try to do long-term care asset protection planning with because of the taxes due when we try to shelter these assets.

The bottom line is this- Medicaid will almost certainly look dramatically different (worse) in 20-30 years than it does now- when you have options, don’t rely on what the government may or may not be providing in the future!   Asset protection trusts make a lot of sense for seniors who waited too long to qualify for long term care insurance.  Many of those same seniors have commented to me that they wished they had taken the advice of their investment adviser and purchased long term care insurance when it was an option years earlier.   Don’t wait until your options are limited- take control of your finances and your future!  This includes planning for long term care, just like when you had young children it was important to have life insurance- because your family was dependent on you for income.   Without proper coverage, you risk the prospect of your life’s savings evaporating in just a few years- or worse yet, leaving a spouse without sufficient means to support themselves after your passing.