Long-Term Care – Part VII (Protecting the Home cont’d)

The Greatest Financial Risk for Seniors: Paying for

Long-Term Care – Part VII (Protecting the Home cont’d)

As an elder law attorney, I often work with retired clients who come in to have basic estate and disability planning documents prepared – Wills, financial powers of attorney, healthcare powers of attorney, and advance medical directives. But increasingly such clients also have questions about whether any options are available to them to protect any of their life savings in the event one (or both) later needed long-term nursing care.

This concern is understandable. For nearly all retirees in this country – except for the very wealthy (or the very poor) – the greatest financial risk they face is later needing to pay for long-term nursing care. With the statewide average cost of a nursing home in Pennsylvania currently (2018 numbers) over $120,000 a year (and the cost in northwest Pennsylvania ranging from $80,000 in the more rural counties to over $140,000 a year in the Erie area), such seniors could go through much of their life savings (if they are married with modest savings), most of their life savings (if they are married with more substantial savings), or all of their life savings (if they are single). And this happens not because they did anything wrong, but simply because they had the misfortune to develop a long-term illness.

If the folks who come to see me are in their 60s or 70s and in good health, with no foreseeable need for long-term nursing care, I generally do not recommend a plan for protecting their financial assets. That’s because in order to protect those assets the clients would have to get them out of their name and control. So unless they are comfortably well off and have financial assets (such as stock or mutual funds) that they never anticipate having to cash in, my advice is to get the benefit of their retirement savings now while they still have their health.

However, I almost always discuss with them an option for protecting their house, as it’s possible to do this without their having to give up any possession or control.

So let’s talk about protecting the house. For most of my clients what works best is to have them transfer their house into an irrevocable trust while retaining a life estate for themselves. There are a number of advantages to this approach.

• Why do this at all? The reason for doing this at all is to protect your house from the risk of later having to be sold and all the proceeds used to pay for the cost of your long-term nursing care.
  • With a married couple the house would not be at risk as long as at least one spouse is living at home. But if one spouse is in a nursing home and the other spouse dies, or if both spouses need nursing-home care, then the house would be at risk of being sold and all the sales proceeds spent down on the cost of their long-term care.
  • For a single person who needs long-term nursing care, the house is clearly at risk: it would either have to be sold during lifetime and the proceeds paid to the nursing home, or sold after death and the proceeds paid to the Pennsylvania Department of Human Services (DHS) to cover its Estate Recovery Claim (also known as the “Medicaid Death Tax”).

But in order for you to protect your home from this risk, you do not need to transfer the entire house out of your name. Rather, you only need to transfer a sufficient interest so that it will not end up in your “probate estate” at your death.

As mentioned in a previous article in this series, we almost never have our clients transfer their entire house outright. Once the home is owned entirely by one or more children or other individuals, it is going to be subject to various unavoidable risks, such as attachment by the child’s creditors, the claims of a divorcing spouse (a potentially very aggressive creditor), bankruptcy, drug and alcohol problems, or the child’s disability or death. Protecting the security of our clients – especially their security in having a place to live – is very important, and that is why we rarely have our clients transfer their home entirely out or their names.^[1]

Instead, we have them transfer a “remainder interest” in their house into an irrevocable trust while retaining a “life estate” for themselves.

• Why should you do it this way? Transferring only a “remainder interest” in your house while retaining a “life estate” for yourself has a number of advantages over transferring the entire house:
• Protects Your Home During Your Lifetime. First, by keeping a life estate you remain the owner of your home during your lifetime with the security of always having a place to live, without the risk of losing your home because of anything that might happen to your children: e.g., Debt, Divorce, Drugs, Disability, or Death.^[2]
• Protects Your Home After Your Death.” Second, at your death your life-estate interest is extinguished, and thus the only interest “remaining” is the “remainder interest.” This means that a 100% interest in your house is automatically in the trust, and under Pennsylvania law your house is thereby protected from the “Medicaid Death Tax.” That’s because the only claim DHS can have against your house is if it ends up in your “probate estate.” If at your death you own nothing in your name alone, there will be nothing in your probate estate and the DHS claim simply goes away.

Contrary to what many people believe, there is no Medicaid lien on your house during your lifetime, no matter how much money DHS has paid out on your behalf.

• Does Not Affect Your Standard of Living. Finally, transferring a “remainder interest” in your house has no effect whatsoever on your standard of living – you continue in full possession and enjoyment of your house just as you did before. You continue to pay the taxes, insurance and maintenance on the house, but for all practical purposes nothing has changed and your quality of life has not been affected.^[3]

Next month’s article will continue this discussion of protecting your house, including the advantages of acting sooner rather than later.

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The content herein is for general informational purposes only and does not constitute legal advice. For specific questions you should consult a qualified elder law attorney.

Note: Working with the long-term care system we have in this country, seniors and their families need to understand that despite the restrictions in the Medicaid law, it is almost never too late to protect part or your remaining assets, even when facing an immediate crisis and with no advance planning. Whether you are 75 years old and living in your own home, or have an 85-year-old spouse in a nursing home, there are steps you can be taking now to preserve part – and often a very significant part – of your life savings otherwise at risk of being spent on your nursing care. But it is more true than ever that “time works against you.” Every day of delay in a crisis can result in $250 or more of irretrievable loss, so it is important to contact a knowledgeable and experienced elder law attorney for advice sooner rather than later.

Kemp Scales is now retired, but elder-law attorney Schellart Los continues to serve clients throughout western Pennsylvania from offices in Erie and Titusville. She can be reached toll-free at (888) 827-2788 or by e-mail at schelly@losscaleselderlaw.com. The Law Offices of Schellart Joyce, LLC has an Internet presence at www.losscaleselderlaw.com.

1. Adding a child’s name to your house as a “joint tenant with right of survivorship” is another way to get your house out of your probate estate, but it is one we rarely use. While this way you retain more control than if you transferred the house entirely out of your name, you would still be subject to the same risks noted above and the house might have to be sold to pay your child’s creditors. (True, the creditors could only claim half the sales proceeds, but that would be small comfort to you if you found yourself homeless.) Also, if your child predeceased you, not only would your entire house be back in your name and unprotected, but you would owe Pennsylvania inheritance on the child’s half-interest in the house. ↑

2. This discussion assumes children who are decent, trustworthy and have their parents’ interest uppermost in mind. But even if this were not so, by having clients retain a “life estate” in their house, it also protects them from the risk of their children kicking them out, selling the house and running off with the money – i.e., “Departure.” ↑

3. As noted above, in order to protect your financial assets you need to transfer them completely out of your name and control. Less money means fewer options, and for most people this would mean a reduction in their standard of living. ↑