Dillman: Economic instability and the need to plan for long-term care

The current economic crisis has rattled the confidence of all of us, including my clients. If you are in a practice that focuses on pre-planning, then I am sure you are seeing a similar reaction. Clients who are typically proactive are now pulling back on the reins and taking care of immediate needs — doing just enough to address these immediate needs — rather than preparing for the near future.

What they are not considering is the cost of not planning ahead. Political instability, rampant inflation and the specter of recession are looming threats to our clients’ financial future, which directly impacts their ability to take care of themselves at a point in their lives when they are likely to need care or other age-related services. It is our job to redouble our efforts to educate our clients and show them how they can preserve assets confidently even in the face of current uncertainty.

As all of us are aware, there is growing concern around the increasing costs of care. Genworth’s Cost of Care survey has shown us that from 2004 through 2021, the cost of long-term care has outpaced inflation and, in some years, by a significant margin. Much of these increases have been driven by a supply and demand issue. Simply, there are not enough providers to care for the growing population of people needing services. This will be true for the next decade, with 10,000 baby boomers turning 65 every day and 70% of them requiring care and support services at some point in their lifetimes. With the added curveball of rampant inflation and economic uncertainty, we are sure to find ourselves in a worst-case scenario.

I’m reminded of an issue our neighbor had with his pool recently. It started as a small leak in the hose connecting the filter to the pool. Over the course of a week or two, he noticed the water levels had dropped significantly and he had to refill the pool. Only after a couple of weeks of this cycle did he have someone come out to look for the root cause. But in that time, he had refilled his pool with hundreds, maybe thousands, of gallons of water. Inflation, if at these levels for a prolonged period, will likewise look small and insignificant at first but could add up to hundreds of thousands of dollars in increased exposure in the future.

It is no secret that inflation of this magnitude, if it’s what we think it is, will directly drive up prices of care far above what we have seen in recent years. Growing costs of supplies, increasing wages for providers and less competition in the long-term care insurance space are all factors impacting the costs of care. Already, the cost of care may be out of reach for many.

Annual median cost of care in Indiana in 2022 (as of Aug. 1)

• Homemaker services: $61,273 (based on 44 hours per week)

• Home health aide: $63,629 (based on 44 hours per week)

• Semi-private room in a nursing home: $97,747

• Private room in a nursing home: $111,657

On average, a person consumes at least three years of care at some level during their lifetime. While the outlook seems grim, there are many pre-planning tools that can be put in place to prevent having to spend down one’s life savings on care. The rule of thumb is that a married couple may be able to preserve 100% of the couple’s assets when one spouse needs long-term care. On average, a single person needing long-term care can preserve anywhere between 50% and 80% of their assets from long-term care spend-down.

How to protect assets from long-term care costs

While there are several ways to build and implement an asset preservation plan, one of the most common tools is an asset protection trust or an irrevocable trust. This is a type of trust where its terms cannot be modified, amended or terminated without the permission of the grantor’s beneficiary or beneficiaries. The grantor, having effectively transferred all ownership of assets into the trust, legally removes their rights of ownership to the assets and the trust. These trusts can be set up to minimize taxation, maximize access to long-term care benefits and protect assets. This is in contrast to a revocable trust, which allows the grantor to modify the trust but loses the benefit of asset protection.

When they first learn about irrevocable asset protection trusts, many clients become nervous about losing control of their wealth. This is where the client education effort is so important. The trust, if drafted and administered properly, allows clients access to trust income and principal if needed. The rules are complex but not impossible to follow, and clients need to have access to this kind of information to make informed decisions.

Why planning ahead matters for long-term care costs

Asset protection trusts need to be established when there is no immediate health care crisis and the creator has no need for long-term care benefits. An asset protection trust will allow a person to protect all their assets if they plan in advance by putting them into this type of irrevocable trust when they are healthy and of sound mind.

It’s a trust that should be considered for clients nearing retirement, those who have passed retirement age, or those who may have health issues and who see the need for public benefits, such as Medicaid for the Aged and Disabled, years down the line.

Medicaid’s 5-year look-back period

Due to Medicaid’s five-year look-back period, it is important to plan at least five years prior to needing long-term care services.

When applying to Medicaid for long-term care benefits, Medicaid will look back five years to ensure no assets were sold or gifted for less than fair market value for the applicant to qualify. For Medicaid purposes, the transfer of assets to an irrevocable trust is seen as a gift and violates the look-back rule. This can result in a period of Medicaid ineligibility.

Those creating an asset protection trust will need to create the trust, transfer assets into the trust and then avoid applying for benefits for at least five years. After that, the client will be fully protected and qualify for Medicaid.

Encourage people to get the education and connection to resources they need

But even if the client does not have the privilege of a five-year pre-plan, there are many asset protection techniques available to clients who need to pay for care right now. If you have clients nearing retirement or with recent changes in their health — a diagnosis or a fall — encourage them to speak with an elder law attorney or someone who has expertise in age-related services who has a deep understanding of Medicaid and long-term care benefits as well as the means to protect their assets. The earlier they plan, the better. With the economic threats eroding the value of our clients’ money, it’s more important than ever to protect the wealth they have now.•

Lisa Dillman is an attorney at Applegate & Dillman Elder Law. The firm specializes in elder law and life care planning, a holistic approach to dealing with legal, financial, medical and emotional issues involved in growing older. The firm has offices in Indianapolis, Carmel and Zionsville. Find out more at www.applegate-dillman.com. Opinions expressed are those of the author.