You Can’t Have Your Cake and Eat It Too.
Many (many) years ago when I was in my junior year of high school I took an economics class and was presented with one of the most intelligent and important questions of my entire academic career. It was an essay question, but it only contained one line, which read as follows:
“Explain the phrase there is no such thing as a free lunch.”
I remember looking at the question and thinking that there must be a catch or that it was some type of trick question, as it seemed too simple to be true. Sadly, I chose not to answer that particular question, opting to answer a more lengthy fact scenario question. I now look back on that decision with some regret. When we reviewed the question, I realized that it was a question that literally could explain most of the problems that we face as a society and as a nation today.
It is a rather simple concept and sadly one that most members of the Democratic Party cannot seem to grasp. Nothing is free. I don’t care what promises are made by politicians of “free” education, healthcare, cell phones, etc. Nothing is free. You want to receive a “free” education and diploma, who pays the teacher for his or her time in the classroom? Who pays for the computers, the textbooks, the paper, the desks, etc.? If you receive a “free” cellphone, who pays for the materials needed to make the phone? Who pays the employees who helped put the phone together? If you go to the doctor’s office to receive your “free” healthcare, who is paying for the nurses, the physician’s assistants, and the doctors? Someone has to pay for the time, materials, and help that are offered; i.e. there is no such thing as a “free lunch.”
Which leads me to my subject matter today; I receive regular phone calls from people asking the same question, “If I prepare an estate plan, will it protect my assets from nursing home expenses?” In other words, how do I get free nursing home care in my final days on this Earth? I always provide the following answer: “Maybe.” Here is why:
- Who do you want to own your assets? The issue of whether or not your assets will go to pay for your nursing home expenses primarily focuses on who is the owner of the assets in question. If it is your bank account and/or your real estate, you should expect that it will be subject to the possibility of being used to pay for your nursing home care. There are exemptions allowed, such as a homestead exemption, which can protect some or all of the value of your residence, but if you want the best possible protection for your assets, you cannot be the owner of the property. Not only that, but in most instances, you must also not be the owner of the property for a minimum of 5 years before you can apply for assistance. One of the exceptions to this situation is for Veterans who apply for assistance from the VA. In those situations, there is no look-back period, but the financial assistance that is provided from the VA is rarely ever enough to pay for the entire nursing home expense. So, here is the most important question that you must answer: Who do you want to own your assets? Are you ready to transfer control of them to someone else and can you trust that person?
- Who or what can you transfer your assets to? If you choose to transfer your assets, who will they go to? Does it have to be a person or are there other options? You can transfer your assets to another person, but you must realize that when you do so, it is no longer yours. That is a serious condition to consider. I have met with many people who advised that they either chose to convey their property to another relative or their attorney advised them to do so. In my opinion, this is an extremely bad idea. As mentioned above, when you convey your property to someone else, it is no longer yours and you no longer have control over it. When you transfer your property to another person you also expose that asset to their liabilities. Are you positive that the person that you transferred the property to will not file bankruptcy? Are you sure that they won’t file for a divorce? These are serious legal ramifications that you must consider before making this decision.
- Should you create an Irrevocable Trust? In my opinion, the better option for conveying your property to another party is to create an Irrevocable Trust and convey your property to that Irrevocable Trust. Now be careful here, as there are some attorneys and financial advisors out there who I believe are misleading their clients and creating illegal or fraudulent “Irrevocable Trusts.” When you create an Irrevocable Trust, you CANNOT be the named Trustee; someone else must be named in that role. You also have to create a separate Tax ID number for the trust and you must complete a separate income tax return for the trust each year. If someone creates an “Irrevocable Trust” that still uses your social security number and you are still the Trustee, you were provided with poor legal or financial advice and your trust agreement is not what was promised to you. So, much like my last point, make sure that you choose someone that you have the utmost confidence in to act as the Trustee, as you are no longer in control. Unlike the last point of transferring your property to another person, this option is safer, as you still retain some limited power over the Irrevocable Trust as the Settlor/Grantor of the trust. Also, the primary goal of the trust is to hold the assets of the trust for the benefit of the Settlor/Grantor of the trust. Finally, as with the previous point, when you convey your assets to the Irrevocable Trust, you must still wait for the look-back time period to pass before you apply for the nursing home assistance. However, if this is your goal, it is clearly the better option of the two transfer choices.
- Who pays for your end of life care? Here is where most people apparently don’t appreciate my advice, but if they care about our nation and our future they should. Somebody has to pay for the care that you receive in your final days on this Earth. There is no such thing as a free lunch. I appreciate that we work hard (hopefully) for all that God entrusts to us during our time on this Earth and I also appreciate the desire to provide for future generations, but as I advise my clients, the primary focus should be to take care of yourself. Do you really want to go cheap for your care in your final days on this Earth? Are your children so poorly raised that they can’t wait for you to die so that they can “cash in?” If you spend the last penny that you have at the exact same time that you take your last breath, then well done! Our country is approximately 21 trillion dollars in debt, it continues to get worse on a daily basis, and it is leading to the death of our Republic. Regardless of what most liberals will admit, the largest part of our spending is on entitlement programs. People are too interested in getting their “free lunch” and not focusing on being financially responsible. Make no mistake, when you hear that something is “government” funded, it is not, it is taxpayer funded. Our government is broke and there is no end in sight. We have hit rock bottom and have decided to get the jackhammer to keep going. Do you want to contribute to that? Should other people pay for your care in your final days when you have the ability to do so yourself? Is that good stewardship of the resources that God provided to you?
- Then how should you take care of the nursing home issue? So, this leads us back to the pending issue of protecting your assets, not acting in an illegal/fraudulent way, and paying for your potential nursing home expenses. The answer is really quite simple: set money aside when you can, as often as you can, and have it reserved for your future nursing home care. You can do this by establishing a long-term care insurance policy, which I highly recommend, but it has some problems that you should be aware of. The first is that long-term care insurance can be very expensive and you might not be approved for it, depending upon your age and health issues. Second, if you created the long-term care insurance policy and need to take money out of it for expenses that are not healthcare related, you will likely be penalized for the withdrawal or not be allowed to take the money out. Finally, if you place a large sum of money into the long-term care insurance policy and do not end up in a nursing home, it is possible that neither you, nor your family will receive that money back as a death benefit when you pass away. It is important to review the terms and the restrictions that your long-term care insurance policy has before investing in this method, but I do recommend this possibility. However, if you want to protect your assets from potential nursing home expenses and you want to avoid the potential pitfalls of the long-term care insurance policy that I just mentioned, I recommend that you speak with a credible financial planner about the possibility of establishing an investment account where you can regularly invest funds that are specifically intended for your potential nursing home expenses. Unlike the long-term care insurance policy, the account will most likely not have a penalty for a distribution that is taken for needs that you have that are not healthcare related, and the policy should have a death benefit that you can pass on to your future heirs.
So there it is the answer to possibly one of the most important question you might ask. Some might disagree with my thoughts and I am happy to know why, but with all of my years of estate planning and administration, I firmly believe that these concepts are the best options on how to proceed. As always, I recommend that you speak with a competent estate planning attorney on these matters, as each situation is different. But if you choose wisely, the end result could be the protection of the assets that God has entrusted you with, the protection of your loved ones, and an honorable means of supporting your end of life care without placing unnecessary additional burdens on our nation.