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The Rise of Long Term Care Insurance and Decline of Trusts in Preventative Planning for Custodial Care

March 28, 2010

In general, the type of legal planning known as Medicaid planning can be effective to obtain governmental coverage of nursing home care. Home care or assisted living, however, usually remains unobtainable without resorting to private payment or long-term care insurance. Since an irrevocable trust is effective only if its principal cannot be distributed to the person who established it, attempting to reserve the use of the principal to pay for home care or assisted living is not possible. If an irrevocable trust is well-drafted, however, principal can be distributed from the trust to others who can opt to pay for the home care or assisted living.

If a person’s principal residence is transferred into an irrevocable trust and the trust triggers the grantor trust rules as to the trust principal, the ability of the donor to use the $250,000.00 capital gains exclusion upon a later sale can be maintained. One common way to trigger grantor trust treatment intentionally is for the donor to reserve a special power of appointment.

Under a 1999 Medicaid regulation promulgated in Massachusetts, a 2-year, $125.00 per day long-term care insurance policy can exempt the home from post-death estate recovery. This regulation replaced the prior requirement of $50.00 per day, which remains in effect for individual long-term care insurance policies issued before March 15, 1999.

The one area where irrevocable trusts pose a huge opportunity is where an elder has a disabled child, especially one who is already receiving SSI or Social Security Disability benefits. Even after a nursing home stay has begun for the parent, transferring assets into an irrevocable trust for such a disabled child does not cause any Medicaid disqualification period at all.

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