Discover the safeguards for your hard-earned assets with expert guidance from certified elder law attorney Todd Whatley and certified financial planner Ian Weiner. Prepare to fortify your family's future as we unravel the complex world of irrevocable trusts and the strategies you need to protect your wealth from Medicaid claims. We're not just scratching the surface; we're providing a roadmap for the prudent management of your estate, ensuring you're well-equipped with knowledge that can withstand the test of time and unforeseen circumstances.
Embark on a journey of financial wisdom as Todd and Ian demystify the intricacies of estate planning. Our discussion navigates through the treacherous misconceptions about revocable and irrevocable trusts, the critical five-year look-back period, and the importance of specialized legal advice. From addressing the challenges of including IRAs and other pre-tax assets in your trust to understanding the tax benefits of maintaining a stepped-up basis for inherited property, this episode is an invaluable resource for anyone seeking to secure their legacy with precision and foresight. Join us and take control of your estate planning with confidence and clarity.
Discover the safeguards for your hard-earned assets with expert guidance from certified elder law attorney Todd Whatley and certified financial planner Ian Weiner. Prepare to fortify your family's future as we unravel the complex world of irrevocable trusts and the strategies you need to protect your wealth from Medicaid claims. We're not just scratching the surface; we're providing a roadmap for the prudent management of your estate, ensuring you're well-equipped with knowledge that can withstand the test of time and unforeseen circumstances.
Embark on a journey of financial wisdom as Todd and Ian demystify the intricacies of estate planning. Our discussion navigates through the treacherous misconceptions about revocable and irrevocable trusts, the critical five-year look-back period, and the importance of specialized legal advice. From addressing the challenges of including IRAs and other pre-tax assets in your trust to understanding the tax benefits of maintaining a stepped-up basis for inherited property, this episode is an invaluable resource for anyone seeking to secure their legacy with precision and foresight. Join us and take control of your estate planning with confidence and clarity.
Welcome to Wealth for Generations, the podcast where you learn to grow, protect and preserve your wealth for generations. Our hosts on today's show are Todd Wattley, a certified elder law attorney, and Ian Weiner, a certified financial planner. Join us and our expert guests as we uncover the mindsets, tools and strategies to help you maximize your wealth and impact. Please embark on this journey to secure your legacy. Please note this podcast is for informational purposes only and is not intended as financial or legal advice. Always consult with a professional regarding your specific situation.
Speaker 2:Hello and welcome to the Wealth for Generations podcast. I am one of your co-hosts, ian Weiner, and I am here today with my other co-host, todd Wattley. Todd, welcome, hey, thank you very much. In our Trust series today, this will be a fun one because a lot of things law and financial planning stuff changes.
Speaker 1:There are things that are updating all the time.
Speaker 2:I wanted to record this one because this is an issue that I think is extremely important for people to understand, whatever their age is, but also particularly for folks who are in that retired phase of life and thinking about protecting assets, particularly from Medicaid. Let's talk about some of the issues here, what the current tools are and maybe foreshadow what's coming. Sure, at least in Arkansas.
Speaker 3:Yeah, as an adult law attorney, one of the things I do for folks is help them get the care that they need without going broke. Okay, that's my catchphrase. That is typically nursing homes, particularly if you're in Arkansas and surrounding states. Oakley Home is a little cheaper. The upper parts of Missouri are a little more expensive, but generally you're going to spend somewhere between $7,500 and $10,000 a month for nursing home costs, and that's, in today's dollars, $24. Today $24,. Yes, and that concerns people because that can tremendously devastate someone's estate.
Speaker 3:And there are a lot of misconceptions and that's probably another podcast is Medicaid misconceptions. But today one of the coolest things we can do to protect somewhat large estates and make both spouses much more closer to being qualified for Medicaid is to do a very specific type of trust that protects those assets from the Medicaid rules. Okay, now.
Speaker 3:So let's just say real quick people think I've got a trust. Okay, great, it's probably revocable living trust. If you're in control of it and you benefit from it, it's a revocable living trust and that does not protect you from Medicaid and that's one of those big misconceptions. It's huge.
Speaker 2:I think something that I want to say here before we move forward is we're not doing anything that is not legal. I want to be abundantly clear about this, and the frame of mind, the mindset that I want to encourage you to have as you listen to anything we talk about on this show, but particularly this episode, is it's our job to know the rules and to play by the rules. That's literally what we're doing.
Speaker 3:You can't do this trust today and qualify for Medicaid tomorrow. Okay, it's not that easy. It doesn't work that way. Congress is not that dumb. Okay, that may not be the smartest bunch of folks, but they're not that dumb. So when we do this trust and I'll go into the details of it, but this trust will protect your assets from Medicaid, but you won't get Medicaid for the next five years.
Speaker 3:After doing this trust, there is a five-year look back, and let's talk about that for just a second. Congress came up with that number back before 2006, which I've practiced pre-2006. The look back was three years. Okay, so there was a three-year look back, and what the look back is, medicaid says if you give away assets, we're going. Well, when you apply, there is a period of time we can go back and look at your assets, we being Medicaid. And so, prior to 2006, they could go back for three years and see what you have done.
Speaker 3:What they are looking for is gifts. Have you made gifts during this period? If so, we're going to penalize you for the length of time that that gift would have paid for the nursing home had you not given it away. It's not a penalty such as jail. It's just we're not going to pay for the nursing home for the length of time, and in 2006, they expanded that to five years and so basically, to be honest, most people don't live five years in a nursing home.
Speaker 3:That's the point Congress knew. People are living past three years and so therefore we need to expand this. And if you go into the nursing home and you've made gifts, medicaid won't pay for the next five years because chances are you're not going to make it five years. But that's kind of the agreement between Congress and us. It says, hey, if you're willing to give away assets or put your assets into something that you don't control and you don't benefit from, you know you're going to have to pay for, and you do that for five years prior to needing care, sure, we will pay for your care. So this is not something you can do today and qualify but tomorrow. It's something you have to do early and know we're not going to qualify typically for the next five years.
Speaker 2:So this is a really a big planning opportunity for a lot of people, but it has to be done early. We've got to be really proactive and start planning ahead right, big time ahead.
Speaker 3:We can do it for people that are going into the nursing home, but typically that's your high net worth folks. Typically five years worth of nursing home care is going to be $300,000 to $400,000. So you can't have $200,000 and do this trust.
Speaker 3:And that's probably conservative, that's very conservative. That's including income, income paying some and then three, four, $500,000 paying the rest. So therefore you need a lot of money. But if you know, ok, we'll pay $500,000 for the next five years, but after that we can go on Medicaid Again. If you make it five years, which most people don't, but if you did make it, Congress is like fine, put $3 million in this, trust. You pay for five years, we'll pay the rest of the time.
Speaker 2:That's the agreement with Medicaid and from their perspective, from the government's perspective, they're betting against you making it five years.
Speaker 2:I think that's really the way you've got to think about it. But imagine for a couple in, let's just say, in Northwest Arkansas, where we are, assets include your house, they include life insurance, they include retirement accounts. Over the next 10, 15 years, the average home price around here is going to probably be well over half a million dollars, and so it's not unreasonable to think that this kind of planning is going to affect a lot more people in our area a lot more often. And let's say it is. Let's just make math easy and say it's $400,000 per husband, wife, per person. I mean, this is the potential to save almost $1 million If we do this the right way. Is that a problem worth solving? I think probably. Yes, yeah absolutely so.
Speaker 3:Yeah, let's talk about the home real quick, and one of the key features of this trust is your home can be protected. Your home is a non-countable asset, and, particularly if a spouse lives there, it's regardless of value. The problem, though, is once you go on to Medicaid either spouse goes on to Medicaid or a single person goes on to Medicaid you can't sell that house until after the person dies. The protection that we do is known as a benign fishery deed. That says at my death, this house goes to these people and, under our console law since 2019, the benign fishery deed protects it the home from the Medicaid lien. The reason Medicaid lets you keep your home upwards of $600,000, $700,000 is they want to put a lien on it and get their money back.
Speaker 2:So people that try to do this themselves and mess it up, medicaid's gonna put a lien on the property and when they pass they'll get their money back Exactly.
Speaker 3:So, yes, the beneficiary deed will fix that, but you can't sell it. And so when the person goes into the nursing home, we have this house here with taxes and insurance and upkeep, and trying to ensure an empty house is tremendously expensive, and so that causes a problem. But if we put it into this trust, yes, you can live there and, yes, your home is a protected asset. But being in this trust, once you go into the nursing home, we can sell this house. The kids can now sell the house, get the money and do something with it, whereas without the use of this trust, it's just stuck there.
Speaker 2:And you've got to pay the expenses to maintain it and keep it up, you know. So that's $20,000, $30,000 a year if you're not careful quick.
Speaker 3:And what I see sometimes is there's the family farm or family land and mom and dad are getting older, they can't take care of it anymore, so they don't sell it because it's the family farm and they buy something small or they rent something in town closer to doctors, closer to grocery stores, things like that and we have this family farm that we don't wanna lose. If they're not living there, it's not your home anymore and so that is a countable asset, and if it's worth more than $2,000, you won't qualify for Medicaid. This is a huge problem. That's a problem, and it's like what do we do? Well, we put it into this trust. We put it in this trust. You make it five years and it is protected. If you did wanna sell it, you could sell it, but you don't have to worry about it anymore. It's outside of mom and dad's grasp and it's in this trust. So let's talk about the trust real quick. It has to be an irrevocable trust, okay, but any irrevocable trust, and that's a stress word.
Speaker 3:Right, it is scary because that means it can't be changed. What's even more scary is you go to a non-elder law attorney who thinks they know Medicaid. They're like okay, irrevocable trust can protect assets from Medicaid, so let's do an irrevocable trust. Well, you don't wanna lose control and you don't wanna lose benefits, so it's irrevocable and, as far as I understand, that protects it from Medicaid. But you're the beneficiary and you can still be the trustee of it. Well, that sounds great until you need nursing home care and they come to see me and I'm like yeah, sorry, this trust does not protect you, but that lawyer told me it would. Well, they were incorrect okay, that is.
Speaker 2:I can imagine that that is not a fun meeting. Those are bad meetings, tev Bad meetings. But let me just underline this point here. This is what happens when you try to do it yourself or when you try to have the family law attorney who you've known for a long time. There's a great attorney, yeah, great guy, really nice guy. Sponsors the soccer team or whatever, like I'm just. You know you don't wanna cross competencies here. Specialties matter in law big time and it's too late at this point.
Speaker 3:When you think this trust is gonna do what you thought it was gonna do and it doesn't, we've gotta start a brand new five year. Look back, or this is an irrevocable trust. The attorney did make it irrevocable, but it's still a countable asset. So now it's countable and we can't change it. That's the worst of both worlds.
Speaker 2:This is a half million to a million dollar mistake. I don't wanna overstate this, but this is a huge, huge mistake, huge mistake.
Speaker 3:So the trust has to be irrevocable. Here's the hard part you cannot be the trustee of it, because Arkansas Medicaid has pretty clearly said if you're in control of it, even if you put language in there, the trustee cannot benefit from this. They're still going to manipulate it to say, yeah, this is a problem, and then you cannot be the beneficiary of it.
Speaker 3:Now we are recording this in late February of 2024. Okay, there is supposedly a new trust coming out that was approved last year. I'm still doing the research on it. We think it's going to protect from Medicaid and you can benefit from it. But sitting here today end of February 2024, I am telling you the way to be protected from Medicaid is to have an irrevocable trust that you do not control and you do not benefit from it.
Speaker 2:So you just so what happens? You just lose all your money.
Speaker 1:Then, and let's talk about what actually happened, sure.
Speaker 2:Because these are the fears, right? Yeah, that word is so scary, but if you have a great team and you plan thoughtfully, this is actually a really great tool. Sure, I mean, this is how you really protect assets from other things besides Medicaid too. True, that's true.
Speaker 3:So, yeah, lawsuits, things like that. So you don't put everything into this trust, all right, you still keep out money. Number one you don't want to be broke. But number two remember, we can't get Medicaid for the next five years. So we need to run some calculations to see how much is Medicaid going to cost us for the next five years. Worst case scenario we do the trust today and you go into the nursing home tomorrow. How much is this going to cost? Let's just take some numbers, nice round numbers. Let's say the nursing home is $8,000 a month and you make $2,000 a month, so that leaves $6,000 a month. We've got to pay $6,000 a month times 60 months, this is $360,000.
Speaker 2:Okay, Right, yep, okay, just making sure Ian's the math guy here I was going through numbers, I was like okay, so at $8,000, it's $92 a year. That makes Geez.
Speaker 3:So yeah, so we need almost $400,000 looking into your inflation, things like that. So let's just say we need $400,000. So you're going to keep out $400,000. And every month you don't go into the nursing home. That's like $6,000 that is freed up for you. So you're not broke. You don't have to beg the kids for money. You have $400,000 that you can live, a five-spin, do whatever. Everything else then goes into the trust.
Speaker 3:Okay, the huge mistake that I see attorneys do is they put everything into the trust. Oh, I want to protect everything. Well, sure you do, but if you need nursing home care for the next five years, that's a problem. Now do we make this? And I don't like putting this out on the air, but I'll, in general, say you don't benefit from this trust. Your kids can give you money if they want to out of the goodness of their heart, and so there are some provisions that if you absolutely needed some money from this trust or needed money from your kids, we could do that. But the trust cannot say money in this trust goes back to the parents. It's irrevocable. You don't benefit from it and you don't control it, and so that scares a lot of people from wanting to put things into the trust. But what you put into the trust will be protected from Medicaid.
Speaker 2:Whoo yeah.
Speaker 3:It's a lot.
Speaker 2:It's complicated but problems that are big enough to solve like this. You know half a million million dollar problems. They require somewhat complicated solutions.
Speaker 3:This is why you don't want your divorce lawyer trying to figure this out, because this is it's not just the trust. I mean, the trust is crucial that it be worded correctly, but then it's what goes in the trust and what doesn't go into the trust. And this is actually. I do a coaching program and generally I coach people for about a year and these are lawyers. These are lawyers who want to do elder law and I'm teaching them this.
Speaker 3:This is about six months into the training to say okay now you understand the trust, now let's decide what goes into it, and that's a whole complicated calculation process to figure out okay, we need to keep some money, how much do we need to keep? But then everything else goes in. And so also another funny thing not that this really matters, but if you did come to me and say, todd, I absolutely want to do this trust, okay, well, let's talk about it. And you're like, yeah, let's do it, and I'm like, no, we're not doing it today. I will make you go home and sleep on it for at least two weeks, because this is a major decision, it's an irrevocable trust. And so people get frustrated sometimes. So I guess, todd, I want to do it.
Speaker 3:Well, I've been down this road so many times that I've done it on the first meeting and people get cold feet and they come back and say I can't change my mind. I'm like I've already spent a lot of time on it and this trust is not cheap. Okay, I'll just tell you. But the benefit that it gets you in today's dollars after five years, it's an $8,000 a month benefit. You're getting $8,000 worth of benefit every single month after five years.
Speaker 3:And so this trust is not cheap. But when people say, yeah, let's do it and I used to do it, and then they're like, yeah, I changed my mind, I want my money back. I'm like, but I've already spent a lot of time on this, so I won't let you decide day one to do it. You're going to go home and think about it and then come back in two weeks, answer some more questions and if you still it's kind of a cooling off period Okay To say, if you still want to do this and take this huge step of losing control and losing benefit of a good portion of your, your assets, sure we'll do it.
Speaker 2:So I want to talk about two things. One you know, at what asset level does this really start to make sense for somebody? And then two okay, who does have control and who benefits and how does that and how does that work? Sure, so where do we really start to look at this?
Speaker 3:Well, again, you know, being conservative, nursing homes are going to cost. You know, 60 months worth of nursing home care is going to be somewhere between $400 and $600,000. Per person yeah, per person. You know, we would hope not both people go into the nurse home, so you would need to have enough assets that keeping out $400,000 would still leave enough money to put into this trust. And so, honestly, that gets into the almost million dollar range. So if your assets are a million bucks, then this probably starts to make sense for you, and the more over a million dollars it it makes even better sense. Now here's the killer. Okay, and I've had great clients. I absolutely want to do this Great. How much money do you have? I have a house worth half a million dollars and I've got a million bucks. Perfect, we can keep half of that out, put your home in the trust and put the other half of your assets in the trust, okay, and they hand me their bank statements and it's in 900,000 of the million is IRAs. Whoops.
Speaker 3:You don't want to pay $450,000 in taxes this year, do you no?
Speaker 2:That's creating the problem we're trying to solve. We don't want to do that.
Speaker 3:So you would have to get a lot of months of Medicaid at $8,000 a month and to make up for that $450,000, it's taxes. Iras are pre-tax money, 401ks.
Speaker 2:So that's a challenge.
Speaker 3:Again, if you're young, sure, we can do this trust, but we've got to start getting you out of those IRAs the best way possible, and so that's why you may need to do five years worth of work before doing this trust, which then still needs five years of health. So you're looking at 10 years before you need nursing home care for this to really make sense.
Speaker 2:This is definitely advanced planning. The annuity shop is not going to be able to handle this for you and the friendly big green or big yellow broker is not thinking about this stuff and is not doing this stuff. But, as I've said a couple times and I want to emphasize this, this is a million-dollar idea. This is a million dollars in savings for a family, and so it's like okay, well, we really this is a problem worth considering and worth solving, and a part of it that I wanted to make sure we touch on is okay, the money, the stuff goes into the trust. Then what? What happens? Who manages it? Who benefits from it? So this is important.
Speaker 3:Yeah, typically, I want Okay, what's your point?
Speaker 3:Alright, family members to be trustees of the trust, typically the kids.
Speaker 3:Okay, so the kids are in control of this and mom and dad are still alive, and so they you know, mom and dad can still see, see what's going on.
Speaker 3:And so there's still some obligation to the parents to say, yes, mom and dad, here's the money, it's still there, but, yeah, it can be invested, it can grow, and in fact, there were lifetime beneficiaries of this trust, which means someone who, during the lifetime of the parents, can benefit from this trust. And so, if you needed, if the kids needed, down payment for a house, everybody comes together and says, yes, we think this is a good experience from the trust, just like the parents would say, sure, we'll give you a hundred thousand dollars, you can, you can pull a hundred thousand dollars from this trust, give it to a kid and and that's perfectly fine, okay, and then that's kind of how we, you know, if absolutely necessary, we can get money back to the parents, is it goes from the trust to the lifetime benefit, fishery the kid. And then the kid, out of the goodness of their heart, says here, mom and dad, I will give you some money, we'll buy you some new shoes, right, you kind of wearing, wearing the, this whole little thing right now.
Speaker 3:You want to go on that cruise or you know whatever. Sure, they can do that, but there can be no written requirements that the trust give money back to the parents directly. That's critical.
Speaker 2:Now, when, the, when the parents that that create this trust when they pass what happens? Sure, Do we create additional trusts.
Speaker 3:then it's, it's, then just like your revocable living trust. It then creates testimony trust for the kids, so that this money goes into a trust for each kid. They can be in control of it, they benefit from it and it's protected from bankruptcy, divorce and lawsuits of the kids which is huge, because people are like well, can I just give money to my kids?
Speaker 3:That's the the same five year. Look back. Sure, you can, but if you just give it to them, it's their money and then it's subject to bankruptcy, divorce and lawsuits. And if they blow it, there's none to give back to you if you needed it, and so it's just a really. And there's capital gains issues with real estate. This, this trust, will protect that step up in basis. That's important, meaning that property that goes to the kids, they get it at the value as of the date of your death If you put it in this trust. But if you just give them property during your lifetime, they get it at your basis which could be very low and they turn around and sell it.
Speaker 3:They're going to pay a big tax bill which is prevented from this. There's been times that specific issue Someone bought land in Northwest Arkansas for $100,000 and now it's worth 1.5 million. That's a huge tax bill, but we, if you just give it to the kids, but if you put it in this trust, they get it at 1.5 million as of the date of your death. They pay zero tax.
Speaker 2:That's a big deal Now. That's under current law as well. There's some, there's some conversation about that changing. It may not be for a few years, but it's on the it's probably on the horizon. So, sadly, you know, these are, these are things that are going to continue to change. But I'm so glad that we talked about this because there are so many misconceptions about this type of planning, about this type of trust, how it really works. You know, I think the folks that can really benefit from this are folks that do want some of their assets that they've worked hard for to go to the kids. I feel there's a very big gifting and sort of legacy component here in a lot of cases. You know those types of clients that I work with. I encourage them to be thoughtful about gifting while they're here so that they can not only see the kids or the grandkids use that money and enjoy that with them, but also so that they can help them to steward it and shape those values of okay, why do we do this? And that's really important.
Speaker 3:Well, and you just made me think, you encouraged me. I had some stock that had appreciated very well Apple stock and I was like I don't wanna pay this tax. And so you told me to put it into this charitable fund that I can now use this to pay charities for the rest of my life basically, you can pass it to the kids if you want.
Speaker 3:Right, and so, with this trust, you may want to give money to a grandchild, but they're 13. Well, in seven years that would be 20, going to college. Okay, I'll give them money then. Well, but every time you make a gift that starts a new five-year clock. Do one big, massive transfer. Now put it in this trust. And then the trust, like I said, everybody comes together and says, hey, joey's going to college, let's give him $40,000, do it. That's a gift from the trust. You made your big gift five years ago, seven years ago. It's done and over with, and so, just like you said, the planning, you can make gifts later on from the trust rather than from you starting a brand new five-year clock.
Speaker 2:The other important piece that we haven't talked about is there's additional planning that needs to be done around estate taxes too, but there's a strategy to freeze your estate while it's a certain size, especially if you're younger. You have a lot of real estate assets or even life insurance assets. Different clock there, but we have a really high estate tax limit right now, and it might make sense to get some stuff outside of the estate. Right, absolutely. So this is definitely not for everyone. This isn't something that you walk in and you're getting one of these trusts. I want to just make sure that that's the case. I like your approach to it, but there are certain folks that this makes absolutely perfect sense for and they can literally protect hundreds of thousands of dollars with this, and so people need to be educated and this is important.
Speaker 2:So any last thoughts before we kind of end this.
Speaker 3:Just please do it now, okay, because if we wait too late, we can do some cool planning in a crisis oh my goodness, dad's going into the nurse home. Sure, we can do things, we can protect everything, but it all goes to the spouse, and then when that spouse needs nursing home care, we're gonna lose half of it, whereas with this trust, if we did it before either one of them needs care, we're gonna protect a whole lot more money, if not everything. And so, as we keep saying every single podcast, pre-planning is better than crisis. So come see us now, let's talk about it. Even if you don't want to do it now, let's talk about it, and you can think about it for the next year or so and then say, okay, yeah, I think it's time.
Speaker 3:So just please get the information from someone who really knows what they're doing and think about the options. Consider all of your options and plan early rather than during a crisis.
Speaker 2:I love it. Thank you everybody for listening. Follow like, share, subscribe, I should say, and share this with your friends. If you have somebody that you think would benefit from this information or other information, please send this to them, and we look forward to seeing you next time.
Speaker 1:Thank you. Visit us at wwwwealth, the number four, generationscom for more resources and don't forget to subscribe to Wealth for Generations. Until next time, keep building your legacy, one decision at a time.