Most people think that all you need is a simple Will. A Will is used to divide up the leftovers when you pass away. Unfortunately, it’s not as simple as deciding who will get your stuff when you pass away. There are more questions we need to answer. If you are a middle-class family or upper middle-class family and all you have is a Will, it may not be enough.
A Will does not answer the questions such as “How do I make sure that if my wife gets sick, she gets the care that she needs or has a home to live in with money in the bank?” We need to consider how to navigate the long term care system and get the care we need, without going broke in the process. A Will cannot address those issues.
We all pay into this health care system believing that we will have healthcare in our senior years. Unfortunately, Medicare does not pay for custodial long term care in a nursing home.
Meet Fred and Wilma
I want to share a story about a family who would likely end up in a negative situation if they don’t plan properly. On the flip side, if this family did proper planning, things could be so different. Meet Fred and Wilma Flintstone, who have raised one child by the name of Pebbles, and they live in Bedrock.
Fred has been working at the quarry and saved money over the years. They are retiring and are both healthy, and they own their house outright with $400,000 in savings. Believing they need to do estate planning, they consult with as lawyer who tells them that all they need is a simple Will. They go through retirement, taking vacations and spending time with Pebbles who is grown up with her own children.
However, Fred has a stroke and goes to a hospital where they stabilize him. Unfortunately the stroke has left him partially paralyzed and he needs care in a nursing home. Medicare will pay for Fred’s nursing home for 20 days, but thereafter co-payments are needed. Fred will likely not be covered by Medicare for up to 100 days, which means he will be left to pay for his care. Nursing homes cost about $14,000 per month, so without proper planning, Fred and Wilma could go broke paying for his care.
Where Have Their Savings Gone?
Wilma can keep her house and some money, up to a maximum of $150,000. She has to pay $14,000 a month for Fred’s care, and they spend $170,00 in the first year. Wilma does a spend-down, and purchases funeral arrangements. After two years Fred and Wilma have spent $250,000, and Wilma only has $150,000 in savings. Fred is finally eligible for Medicaid benefits, and Wilma can keep her own income. Before Fred went to the nursing home, they needed every penny of his income for expenses. Despite losing most of their savings, Wilma has to pay for Fred’s care with some of his income.
What Will Happen to Wilma?
She cannot afford to live in the house, without spending her savings, which are reduced by $1,000 every month. Wilma is only seventy years old and may live another 20 years. She could outlive her money, and the only place she can get more money is by selling the house. If she does that, she will lose money in taxes. It’s tragic that a family who works hard to save money ends up going broke. Sadly we see it happen often. There are some crisis management techniques that we can employ to protect the money, but doing it this way is not as effective as planning ahead.
If the Flintstones had done some proper planning several years before Fred had a stroke, things would be different. The asset protection trust is an estate planning tool that is used to protect assets. We can put the assets, such as the primary residence into a trust and Fred and Wilma won’t own the house. They can still maintain control over the trust but they cannot receive a distribution from the trust. After five years, the assets in the trust cannot be lost to the Medicaid system. Fred and Wilma can still sleep in their house every night even if it is in the trust. This is why it is important to plan ahead for long term care. The problem is not the nursing home, but the government rulebook that requires you to go broke if you need a nursing home.
After the Trust is Established
It may seem that not much has changed in Fred and Wilma’s situation, but putting the house into a trust is a huge advantage. They don’t own the house in the trust, and only have $400,000 in savings. If Fred needs care in a nursing home after his stroke, Wilma can keep $150,000. Rather than spend the $250,000 on nursing home care, Wilma can buy a house which she is allowed to own, according to Medicaid regulations.
Since they won’t be living in their old house, the trust can sell the house. They may get $300,000 for the house, but Wilma cannot access the money or receive a distribution from that trust. However, Pebbles can receive a distribution from that trust, and with this money she will ensure that her mom is taken care of. We have solved the Flintstones problem by putting their house in a trust. Wilma is going to have a house to live in and some money in the bank, regardless of what happens to Fred and his health.
A Will Is Not Enough
If you are concerned about what would happen if you get sick and whether your wife will have a house to live in, a Will is not enough. I urge you to give some consideration to protect yourself from these long term care issues. Come to one of our workshops to learn more about protecting your assets. You can register for our workshops on our website.