Planning ahead for potential disability and long-term care needs is essential to the goals of many Massachusetts families. However, how savings are achieved through estate planning can be difficult to visualize. Here is an example using an irrevocable grantor trust and a special needs (d4a) trust that helps explain some of the drastic savings that are available to those who plan ahead.
Without Estate Planning
Suppose that Mom and Dad have a house worth $250,000 and $200,000 in savings. They have done no estate planning, and Dad requires long-term care after suffering from dementia. In order for Dad to qualify for MassHealth, they will have to spend about $73,000 because Mom is only allowed to keep $113,000 in assets, not including the home.
If Dad later passes away and Mom needs care, she will have to spend an additional $111,000 before becoming eligible for MassHealth because long-term care applicants are allowed only $2,000 in assets. Depending on the level of care need, a lien may be placed on the family home as well. Suppose further that Mom dies leaving $40,000 outright to her disabled adult son. The son will lose his public benefits until he spends the $40,000, which could have been avoided.
With Estate Planning
Now let’s suppose Mom and Dad, with the same assets, had created an estate planning strategy using trusts. They could, for example, create an irrevocable trust and transfer their home to it, reserving for themselves a life estate and assigning the remainder to a special needs trust established for their son. They could also fund their son’s special needs trust with some of their savings, say $100,000.
Five years and one day from the date of these transfers, Dad will be able to qualify for MassHealth right away, since Mom will only have $100,000 in assets plus her life estate. If Mom has enough income to satisfy her lifestyle, like from social security, she could then transfer her remaining assets to her son’s special needs trust. In five years and one day (because of MassHealth’s look-back period) she will be able to qualify for MassHealth immediately if she needs long-term care.
In this scenario Mom and Dad were able to save over $400,000 from long-term care costs and support their disabled son without jeopardizing his public benefits. When Mom dies, the home will receive a full step up in basis so that it can be sold through the trust with no capital gains taxes due. The sale proceeds will pour into the special needs trust and help supplement their son’s needs for the rest of his life.
By planning ahead, a large amount of assets have been protected, taxes on the family’s estate have been greatly reduced, and the family is able to use their assets how they see fit to support their son. In order to utilize a strategy such as this, however, timing is key—you can’t just wait for an emergency to hit, you must plan now. To learn more about the estate planning options available for your family, call the Heritage Law Center for a free consultation.
