How to think about asset protection

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There’s a common misconception about asset protection: Protecting my assets saves me money right away. In fact, it protects the assets immediately but only saves you money in the long run.

Here’s what I mean. Remember that asset protection . This ensures the property won’t be spent on your own long-term care or recovered by the State after you die—your family will get to keep it. But you don’t transfer everything you own. Whatever isn’t transferred must still be spent on long-term care.

Imagine a single elderly woman who needs nursing home care and has $200,000 in a bank account. If nothing changes, that bank account will be going down by (let’s say) $10,000 per month until it’s all gone (a high estimate, but it makes the numbers easier to comprehend). Medicaid only pays for the care after all $200,000 is spent, which takes 20 months.

What if, in the same situation, $100,000 is in an asset protection trust? That means Medicaid pays for the care after only $100,000 is spent, which takes 10 months. That looks like a good $100,000 saved.

But whether that $100,000 is actually saved or not depends on how long she lives and continues to need care. If she passes away the day after creating the trust, no money has actually been saved; the family gets $200,000, whether half of it is in an asset protection trust or not. If she passes away after 10 months and spending $100,000 on long-term care, again no money has actually been saved; the family gets the remaining $100,000 whether it’s in a trust or not. It’s after this point that money starts being saved (the green zone in the chart below).

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You can see this in the scenario where she passes away after 15 months:

  • Scenario 1: She did no asset protection. She will have spent $150,000, leaving $50,000 for the family.
  • Scenario 2: She protected $100,000 in an asset protection trust. She will have spent $100,000 and then qualified for Medicaid, leaving $100,000 in the asset protection trust for the family.
  • The difference between Scenario 1 and Scenario 2 is $50,000. That is the money actually saved by asset protection.

Note that the full $100,000 isn’t actually saved until she lives and needs long-term care for a full 20 months. This why it’s best to think of asset protection as a cap on liability, rather than an instant savings coupon.

It’s a bit like health insurance with a deductible. Before asset protection, this woman had a “deductible” of $200,000 before her (Medicaid) kicked in; after asset protection, this woman had a “deductible” of $100,000. In either case, that deductible must be spent first, and there’s a decent chance she will never need to spend that much.

before asset protection
after asset protection

Why am I explaining this so carefully? It’s important to making an informed decision. Is it worth the work and legal fees to protect assets? Sometimes asset protection is marketed as if it’s a no-brainer: Pay me $5,000 and you’ll save $100,000. The reality is not so simple.

If you’re wondering about asset protection, talk to an elder law attorney to understand how much you can protect. Then think of the amount that isn’t protected. What are the chances you’ll have to burn through it all paying a nursing home? How long would that take?

If you doubt that will ever happen, asset protection might not accomplish much. But if you’re worried about losing all that money and then some, asset protection may be right for you. It will give you the assurance that this much, and no more, will be lost. It will put a cap on the cost of long-term care.

A Quick Start on Simple Estate Planning: Your will

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Your last will and testament is probably what you thought of first when you thought of estate planning. It contains your directions for who gets your property after you die. But it does some other important things as well:

  • It names a personal representative (other states call this person an executor).
  • If you have minor children, it can nominate guardians for them.
  • It determines who gets your tangible personal property (the stuff around the house).
  • It makes any specific gifts you want to make, such as leaving $5,000 to a charitable organization.
  • It distributes your remaining property. This is everything you own that wasn’t distributed as tangible personal property or a specific gift.
  • Finally, it can create a trust after your death to:
    • Hold distributions for your young children until they reach a responsible age; or
    • Hold distributions to incompetent or disabled beneficiaries (of any age) in a way that allows someone else to manage the assets and doesn’t endanger eligibility for government benefits.

 

Decision: Personal representative

This is the person who will do all the administrative and legal work required to carry out the directions in your will. This person will be in charge of your estate until your final expenses are paid and your final affairs are finished.

A good personal representative is:

  • Trustworthy
  • Responsible
  • Organized
  • Reliable
  • Good at making decisions
  • Good at following directions
  • Good at following through and getting things done
  • A peacemaker who prevents conflict
  • Steadfast if conflict is unavoidable

Few personal representatives have all these qualities. Make the best choice from among the people you trust.

A few more things you should know about your personal representative:

  • This person will most likely hire a lawyer to help with the final affairs. Your personal representative doesn’t have to be a legal or financial expert.
  • This person can always resign. Nominating them does not force them to do the job.
  • The job will probably be easier for someone who lives nearby, or at least in the same state.
  • You can have more than one personal representative at the same time. Two or more people can share the job as co-personal representatives.

You should also name at least one successor personal representative. You never know if the primary person will be available, so you need a backup.

If you are married, it’s common to name your spouse as your primary personal representative. A trusted adult child or sibling also often serves as personal representative. But you can name any adult you trust, no matter their relationship to you.

Consider:

Who might be a good primary personal representative for you?

Who might be a good backup?

 

Decision: Tangible personal property

Your tangible personal property is what I like to call “the stuff around the house.” This includes movable personal property like jewelry, heirlooms, paintings, tools, sports equipment, electronics, furniture, cars, and hobby collections.

For the few sentimental items and heirlooms you want to go to specific people, your will incorporates a memorandum of personal property. This is a list of specific items and who will receive them, signed and dated by you after you execute your will. For now, focus on deciding what should happen to the rest of your stuff.

If you are married, you should leave most or all of your tangible personal property to your spouse first. If you are not married or if your spouse dies before you, this property is commonly left to the children in equal shares, with the provision that they can work out how to divide everything among themselves.

Consider:

Who do you want to receive your tangible personal property?

Your spouse?

Your children? In equal shares?

Someone else?

 

Decision: Specific gifts

Specific gifts are usually small gifts of money or specific assets that happen before the big distribution of everything else. For example, “I give $5,000 to my church” and “I give my cabin up north to my daughter Emily” are specific gifts.

Remember, these gifts happen before the general “I leave everything to my spouse and children” kind of distribution. So if you only had $5,000 left in your estate after paying expenses, taxes, and debts, the church would get everything and your spouse and kids would get nothing. That’s an unusual situation, but something to keep in mind.

Most of my clients do not make specific gifts in their wills. They prefer to make these kinds of gifts during their lifetimes and let everything at death go to their spouse or children. But it is certainly an option, especially if you feel strongly about making a charitable donation at your death or want to ensure a particular asset goes to a particular person.

Consider:

Do you want to make any specific gifts?

 

Decision: Remaining property

Called the remainder in legal parlance, this is the big distribution of “everything else” in your estate after expenses, taxes, debts, and specific gifts. This is what most people think of when they think of making a will.

My clients usually want to leave all their remaining property to their spouse first (if they have one), and then to their children equally (and, if a child happens to die before them, to grandchildren, etc.). Sometimes clients want to disinherit a child or, if childless, distribute their property to someone other than close family.

Consider:

Who do you want to receive your property first?

Your spouse?

Your children? In equal shares?

Someone else?

Who do you want to receive your property second, if your primary beneficiary has died?

Your children? In equal shares?

Someone else?

 

Decision: Guardians for young children

If you have young children, this is the most important reason to make a will. Who do you want to take care of them if you can’t? You’ve probably put a lot of thought into this already. For some this is an easy decision; for others it is the most difficult.

Here are a few things to consider in making this very personal decision:

  • Close family—those most involved in your children’s lives—usually make the best guardians.
  • If you are married, you and your spouse should nominate the same people. If you don’t nominate anyone or nominate different people, you might be setting your two families up for a fight.
  • Make a list of what is most important to you in raising your children. Consider religion, parenting philosophy, values, relationships, location, and lifestyle.
  • Consider the resources of the people you might nominate. Keep in mind that your own resources and life insurance will be available to provide for your children, too.
  • Think about whether you want your children to be raised by a couple, or if you’re okay with a single person caring for them. What do you want to happen if the couple gets divorced, or if one of them dies? What do you want to happen if that single person gets married?

Wisconsin has two types of guardianships: a guardianship of the person and a guardianship of the estate. The guardian of the person will have custody of your children and fill the parental role. The guardian of the estate will hold and manage your child’s property (what he or she inherits from you, potentially) until your child turns 18. For a young child, the guardian of the person and the guardian of the estate are usually the same person. If you want, though, you can nominate different people. I would only recommend this if you feel strongly that one person or couple should have custody of your children but someone else would be better able to manage their inheritance.

If you’re having trouble making this decision, know that you’re not alone.

Consider:

Who would you trust first to have custody of your children?

Who would you trust to manage your children’s inheritances and provide for them financially?

Who might serve as backups?

 

Decision: Trust for young children

If you have a young child, think about what will happen to your property if both you and your spouse die. Even if you nominate a guardian of the estate, whatever you own (including the life insurance benefit) will become your child’s as soon as they turn 18. The way to avoid this is to have your will create a trust to hold the property until an age you choose.

Do you think your child will be able to make responsible and wise decisions with a large amount of money when they are 18? What about when they are 21? When they are 25? When they are 30?

Some of my clients are comfortable giving their child full control of the inheritance at age 18. But if you think it best to have an older, more responsible person control the money until a certain age, you need to have your will create a trust.

If you create such a trust, you also need to decide who that older, more responsible person will be. This person is the trustee. This person is most commonly a family member, and often the same person you’ve nominated as guardian or personal representative. The same qualities that make a good personal representative make a good trustee.

The trustee simply holds the inheritance until your child reaches an age you choose. Most of my clients choose either age 25 or 30 for their child to gain full control of an inheritance. Until then, the trustee invests the property and can spend it for your child’s benefit—it’s just that the trustee makes the final decision to spend or not to spend, rather than your child. You can even direct how you want your trustee to spend the money. For example, you could state that you want the trustee to use the money to pay for your child’s college education.

Consider:

Do you want to create a trust to hold your property for your young children if you die?

At what age are you comfortable with your children receiving full control of their inheritance?

21?

25?

30?

Some other age?

Who should be the trustee managing this property for your children?

The person who is also your personal representative?

The person who is also the children’s guardian?

Someone else?

Who should be the trustee if the person above can’t do it?

The person who is also your personal representative?

The person who is also the children’s guardian?

Someone else?

 

Next: Your power of attorney for finances (coming soon) >

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Who is Medicaid for?

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“Isn’t Medicaid for poor people?”

“If your business is helping people apply for Medicaid, how do you get paid?”

I’ve heard these and similar comments a number of times. They are often the first questions after I explain what I do. Most people know that Medicaid is a social safety net program providing health insurance to people with very low incomes. If my clients are already poor, how does this work as a business?

Although providing health insurance to those with low income is a big and important part of Medicaid, it is not the only part. Medicaid also pays for the long-term care of elderly people—even those who have middle-class income and assets, if the cost of care exceeds their income. In fact, Medicaid pays for 50 to 60% of all long-term care costs in the United States; it’s the de facto long-term care insurance plan for the middle class. That’s the part of Medicaid I deal with.

Think of it this way: when facing a health care bill of $9,000 per month, we’re all poor.

Or consider that nearly a third of people turning age 65 will deplete their savings and need to rely on Medicaid. Full stop. In other words, one third of seniors 65+ are or will be poor by Medicaid’s standards.

As AARP puts it:

Medicaid provides a critical safety net not only for low-income people, but also for formerly middle-income people who have spent their life savings paying for long-term services and supports.

So most of my clients are, in fact, middle-class. They come to me once they know they will need long-term care. They look at the cost of a nursing home, look at their life’s savings, and face a simple fact: they may not be poor yet, but they will be. Someone tells them they should look at Medicaid. That’s when they know they need help.

My clients still have money, but are seeing it evaporate rapidly. Without any legal help, they will lose nearly all their savings—they’ll end up with $2,000 if single, or somewhere between $50,000 and $128,000 if they have a spouse. The rest of their money is going away—to pay for one more nursing home bill before Medicaid kicks in, if nowhere else.

My job as a lawyer is to help my clients be proactive. With planning, I can often ensure a good amount of that evaporating money is saved for the spouse, is saved for the family, or is used to provide for my clients’ future needs.

My job is also to take the worrisome task of the Medicaid application, do it well, and do everything in my power to make sure the process goes smoothly. Sometimes I catch and solve problems that would have left a client both penniless and ineligible for Medicaid. When one mistake on a Medicaid application could cost tens of thousands of dollars, it’s worth hiring an attorney to make sure it’s done right.

Even so, often the most valuable thing I do is give my clients peace of mind and clarity. With Medicaid, it’s hard to know just what you can and can’t do, what will and won’t happen, and what resources you can and can’t keep. I answer those questions.

Medicaid is not just for poor people. It is, increasingly, for the elderly middle class who have no other options.