Estate Planning for Clients Facing Catastrophic Long-Term Care Costs
Many estate-planning attorneys focus on dealing with tax issues when drafting estate plans. However, because many elderly clients are entering skilled nursing facilities, estate-planning attorneys must be familiar with long-term care issues when drafting estate-plans.
Over 40 percent of people age 65 and over need nursing home care at some point in their lifetime. Having the flexibility to take advantage of techniques to avoid needing to spend down investments, and avoid later recovery from the estate by Medi-Cal, would make estate management for any family dealing with a sick parent/spouse more straightforward and cost-effective.
Clients often believe that assets in a revocable trust are protected if Medi-Cal is needed in the future. This is not the case. Assets held in a revocable trust are considered available to an applicant when a Medi-Cal application is submitted. Assets held in a revocable trust are also subject to the estate recovery program.
If the revocable trust is properly drafted, however, the trustee can engage in long-term care planning if the need for Medi-Cal arises. Provisions that should be included in the elder’s trust include: (1) The ability for an agent under a power of attorney to amend or revoke the trust, and (2) The power of the trustee to make gifts on behalf of the settlor.
However, when broad powers are given to the trustee and agent under a power of attorney to amend and revoke the trust, and make gifts from the trust, there is the potential for elder abuse. Thus, great care must be taken in choosing an appropriate trustee.
Moreover, care should be taken when drafting a joint revocable trust. An A-B-C trust, with the deceased spouse’s share going to a bypass trust, with or without a Qualified Terminable Interest Property (QTIP) Trust, should not be used. The reason is that requiring the funding of a bypass trust on the death of the first spouse may present complications if the survivor is in need of Medi-Cal in the future.
The assets held in a bypass trust will be available to the Medi-Cal applicant; there may not be any way to gift those assets if the bypass trust is set up solely for the benefit of the survivor; and the assets in the bypass trust might be subject to recovery if the survivor is able to qualify for benefits.
Drafting a power of attorney with long-term care planning provisions is also crucial. Certain powers may not be execerised by an agent unless specifically included. For example, the right to create, modify, revoke, or terminate a trust, and the right to make or revoke a gift of the principal’s property must be expressly granted. Probate Code §4264. Please note that both the power of attorney and the trust must allow an agent to modify or revoke the trust if this power is desired. See Prob C §15401(c).
If the principal wants the agent to make gifts to herself, that power should be expressly authorized to avoid a claim of self-dealing. With respect to future long-term care planning, the most important powers to include are: (1) The power to create, modify, revoke, or terminate a trust, in whole or in part; (2) The power to make or revoke a gift of the principal’s property in trust or otherwise (allows the agent to engage in Medi-Cal planning that involves the gifting of assets); and (3) The power to designate or change the designation of beneficiaries to receive any property, benefit, or contract right on the principal’s death (allows the agent to ensure that the estate recovery is avoided).
The estate-planning attorney should carefully explain to his or her client the broad nature of these powers and the potential for an abuse of power by the agent. The agent should be selected with the greatest of care.