There’s a good chance that you will need long-term care as you age. After all, more than half of adults 65 and older need this sort of care when a medical issue leaves them unable to care for themselves, according to the Department of Health and Human Services. That’s why it’s important to plan for this possibility, especially considering that professional long-term care at home or in a facility can be incredibly expensive. 

One way to plan financially for long-term care is to create a trust. And, no, a trust isn’t just something the wealthy use to pass on their money from generation to generation. It can be an incredibly useful tool to protect your assets if you become incapacitated and to shield your assets to qualify for certain long-term care benefits.

Carefull family finance expert Cameron Huddleston spoke with elder law attorney Harry Margolis, author of The Baby Boomers Guide to Trusts, about how to use trusts to plan for long-term care. Below is an edited version of their conversation. You can watch the full interview here.

What is a trust?

Cameron Huddleston: I want to talk to you about trusts, and I'm hoping we can start by just getting you to explain what they are.

Harry Margolis: Trusts are an estate planning tool. They're the most useful estate planning tool and often the most misunderstood estate planning tool.

Basically, a trust is its own financial entity, almost like another person. It holds assets, and they're different personnel involved in a trust. There's the trustee who runs things. There's the grant or donor who creates the trust. And there are the beneficiaries for whom all this is done. Sometimes, the same person can be in all three roles.

The trustee must follow the rules of the trust. The trust document says who is the beneficiary, what are the terms under which assets should be held, what are the terms under which income or principal might be distributed to various beneficiaries. The trustee needs to follow that kind of rule book that's set out in the trust. 

The trust is basically a separate financial entity with someone creating it and a trustee managing whatever's in the trust, whether it's investments or savings or real estate, for the benefit of beneficiaries.

How can a trust be used for long-term care planning?

‍Cameron: I'm sure a lot of people often think that a trust is something that only wealthy people create. But that's not the case, right? A trust can serve a lot of purposes, and you don't necessarily have to be a really wealthy person to set up a trust.  So how can you use a trust to help with long-term care planning?

‍Harry: I'm going to distinguish between two kinds of trusts. There are revocable trusts. Those are trusts you can change. There are irrevocable trusts. Those are trusts you can't change. 

Revocable trusts are often used for two purposes. One is to avoid probate. But they're also really good for asset management, financial management in the event of incapacity because the trustee can step in and manage your affairs if you have your assets in a trust and do it relatively seamlessly. 

You can also keep an eye on people [with a trust]. One thing that often happens to people as they age is they become victims of fraud. If you have a co-trustee on the trust, they can see what's going on and make sure that if all of a sudden money in an account is being depleted, that stops. It's a really good mechanism for having some oversight and assistance as you age. 

People may say, “Well, why not just have a durable power of attorney? Isn't that just as good?” A durable power of attorney is really good and really important to have. But, actually, it doesn't work quite as well as a trust. 

For reasons that don't make sense to attorneys in this field, but a lot of banks and financial institutions resist honoring powers of attorney, and they're more comfortable with trusts. So, often, powers of attorney don't work the way they should. And with powers of attorney, while they don't really take away your rights, it's sort of hard to have somebody who's on the power of attorney managing your affairs. They usually step in once you become incapacitated. 

You can have a co-trustee and on a trust and still manage your own affairs. They're just ready to step in at any time. We find that they work better for incapacity planning than powers of attorney. Those are revocable trusts. They’re sometimes called living trusts, which is the same thing as revocable trust. 

How irrevocable trusts can be used for Medicaid planning

‍Harry: Irrevocable trusts you cannot change after they're set up, and they're used for different kinds of long-term care planning. It's really Medicaid planning because you can create a trust that shelters assets and it really solves two problems that have to do with Medicaid.

The first is, once the assets are in the trust and it's properly drafted, they won't be counted in determining whether you're eligible for benefits. Then the assets in the trust, when you die, won't be subject to Medicaid estate recovery at that point for the state to get its money back. 

In terms of eligibility for Medicaid in most states, in order to get Medicaid coverage of your care, whether it's in a nursing home or home, or assisted living, you have to spend down to $2,000. The state doesn't want you to give away all your assets and qualify for Medicaid the next day. So they also impose what's called a transfer penalty, which, in essence, makes you, if you give away assets, ineligible for benefits for the next five years.

If you're planning in advance, you can put money into an irrevocable trust, or, often, a house into an irrevocable trust. If you do that five years before you need to apply for benefits, the transfer penalty will have expired at that point. And the assets in the trust will be protected. 

People often put their houses in these trusts because the house is a significant asset, both in value and it may have real meaning to you and your family. A lot of our clients say, “I'm going to protect my house, but I'm going to leave my assets really unprotected.” That's important for a number of reasons. It means that you have money in case you need care or have expenses during that five-year waiting period. Even after five years have passed, depending on the state, Medicaid may only pay for nursing home care and not for home care or assisted living care. If you have nothing left because everything's been transferred into an irrevocable trust, you may be forced into a nursing home when you'd rather be at home. So it's good to keep some resources out of the trust. Never put all your eggs in one basket. 

You can keep your house up to a certain value and still get Medicaid. So you might say, well, why put your house into an irrevocable trust? Because you can get Medicaid and keep the house. And there's really two reasons for that. One is that if you move to a nursing home, your family might want to sell the house. Then it becomes cash that would have to be spent down. Having the house in trust means that the trust could sell the house and then protect the proceeds. So that's one benefit of the trust. 

But the other that I alluded to earlier is a state recovery. Medicaid allows you to keep the house. But if you pass away and the house is in your probate estate, then the state has a claim against the house for whatever it's paid for your care. So if it's in an irrevocable trust, it just passes to whomever you named in the trust. When you pass away, then it's not subject to a state recovery. 

How Medicaid can pay for long-term care

‍Cameron: I think we need to go back and explain some of these things for people who aren't very familiar with how Medicaid even works. What sort of care can Medicaid pay for?

‍Harry: It pays for nursing home care, and that's true everywhere. Most nursing homes around the country participate in the program. Assisted living and home care are much more complicated and differ from state to state—sometimes from facility to facility within states. 

Many [assisted living facilities] don't participate. And those that participate may have a very limited number of qualifying apartments, rooms, or units that will take Medicaid for. So it's often a very difficult situation for families because they usually have to go in and pay privately for a period of time.

[ Find Out: How Medicaid Can Pay for Long-Term Care ]

What are the financial requirements to qualify for Medicaid?

‍Cameron: As you mentioned already, there are financial requirements to become eligible for Medicaid. And this is where the whole trust planning comes in. I know that those requirements can vary from state to state, but can you give us a general idea of what it takes to become financially eligible for Medicaid and what you mean by spending down assets to qualify?

‍Harry: You're generally limited to $2,000 in assets plus your home. If you're married, your spouse is limited to about $130,000 in assets, in addition to the home, and, depending on your state, the retirement plan. So if your spouse has assets in an IRA or 401k plan, that may or may not be counted against this limit. 

As I said earlier, Medicaid penalizes transfers of assets. So you can't transfer assets for the most part and get Medicaid the next day. That's always the rule in nursing homes. For home care, those are not necessarily the rules. Depending on the home care program, you actually might be able to transfer assets and get Medicaid the next day, get down to that $2,000, but it depends on the state.

These are the transfer restrictions. But if you spend your money, there's no restrictions on spending your money. So if you're spending down to get down to the $2,000 by paying for home care, paying for assisted living care, paying for nursing home care, paying to fix up your house, paying any legitimate expenses, that's OK. There's no waiting period. It's just that you're not eligible until you get down to that $2,000.

What are the other benefits of a trust?

‍Cameron: A lot of times, people don't even think about long-term care until they need it. This takes planning. So what are the benefits of meeting with an elder law attorney to create a trust and do this sort of plan? What if you never even need long-term care? Are there some benefits beyond simply trying to set aside assets to help cover the cost of care or to shield those assets if you want to pass them on to the next generation?

‍Harry: Certainly, there's the benefit of resting easier, sleeping better at night knowing that everything you've built up during your life is not at risk. But there are a lot of benefits to the revocable trust I talked about in terms of financial management and probate avoidance. It just makes things a lot easier when you pass away. 

Another benefit, I think, I found in a lot of my cases is that clients often come in having accumulated different accounts over the years in different places. So they might have a dozen different accounts in different banks and financial institutions. For a revocable trust to work, you have to transfer those assets into an account in the trust’s name. Doing that helps people understand what their financial situation is because now everything's in one place and you can just see the total. And it certainly makes life a lot easier for their kids because now they've done the work to get everything in one place. 

Trusts, in general, allow you to do a lot of planning for what you would want to have happen with your estate once you pass away. You can say, I die, the trust ends, and everything gets distributed out. But you can also say the trust will continue for the benefit of my children or grandchildren. By doing that, you can provide them with a lot of protections. A trust that you create for the benefit of others, which is sometimes called a third-party trust, can be protected from their creditors. The funds in the trust can be protected in case they get divorced. Or if you have a child who passes away leaving grandchildren, the money can stay in trust for the grandchildren rather than going to the spouse who then gets remarried. So those are provisions you can put into a revocable trust or an irrevocable trust. That can do a lot for your family down the road.

How much does it cost to create a trust?

Cameron: Can you give people an idea of how much it might cost to meet with an attorney to set up a trust?

Harry: There is a big range, but probably you're talking, depending on your situation and the lawyer and the state, between $2,500 and $5,000. 

‍Cameron: I do know that there are DIY options available online, not just for wills, but also for trust. If people are thinking, “I'm going to use this more affordable option,”  what would you say to that?

‍Harry: I would say if you're simply doing a revocable trust for estate planning purposes, the DIY option might be fine. The biggest risks are probably a couple. One is you just don't get questions answered. But the bigger one is that you don't actually transfer assets into the trust. 

We've had a number of cases in our office where people have created a DIY trust, sometimes a perfectly good trust, but they didn't understand that you also have to transfer the assets into the trust. If you go to a lawyer, along with the trust, you'll do what's called a pour-over will. The pour-over will says that everything I've got goes to the trust. If you don't have a will, then it’s as if you didn't have a trust. The state has its own rules for who will get your stuff called the rules of intestacy. 

I'm sure the DIY trust forms are fine and good. Just make sure you do the transfer and do the pour-over will at the same time. 

Moving to long-term care planning, I would definitely use an elder law attorney. And you have to use an elder law attorney in your state because every state is so different. That's important to keep in mind because oftentimes those DIY documents aren't necessarily state-specific. And like you said, when it comes to long-term care and Medicaid, the rules do vary state by state.

It is really important to work with someone who knows the laws of your state to get it right. The last thing you want to do is end up with a document that's not going to help you.

This content comes from Cameron Huddleston of NAIFA partner, Carefull. You can read the original article on their website. Members can learn about how Carefull can help them in the Education Partners area of the member portal.