QUESTION: What is very expensive, absolutely necessary for everyone, but only useful to somewhere around 50 percent of retirees?
ANSWER: A plan for funding long term care
You see, figuring out how you are going to pay for long term care IF it turns out you need the services at some point in your future is one of the biggest riddles of retirement planning.
Long term care is prohibitively expensive. You could quickly run through your assets if you require the care. And, it is essentially a bit worse than a coin flip if you will need to make the expenditure or not.
According to AARP:
- 47% of men 65 and older will need long-term care during their lifetimes.
- 58% of women 65 and older will need long-term care during their lifetimes.
There are few good solutions for long term care risk. Some of your options for covering the cost include:
- Savings– many families run through all of their assets on care and then opt into Medicaid.
- Long term care insurance– but it can be expensive and unreliable. Learn more about the costs or explore the pros and cons.
- Reliance on family members — not everyone can or wants to do this.
- Purchase of an old age annuity
Try out any these options in the NewRetirement Retirement Planner and compare your long term financial outcomes.
If you have assets, but would prefer that you pass those onto heirs rather than use them on long term care if you require the service, then an asset protection trust might be a good option, depending on your goals and values.
It is definitely not a great solution for everyone though.
An asset protection trust is a trust that holds assets with the purpose of shielding them from creditors.
When you set up an asset protection trust, you transfer ownership of assets to a trustee who will manage the money or property for you.
An asset protection trust is an irrevocable trust meaning that it can not be easily changed once it is set up. However, you can typically set up the trust with protections for things that might go wrong and in a way that allows you to:
- Serve as trustees
- Manage assets
- Receive income and pay income tax from the trust
With your assets socked away in a trust, you will not be required to use them to fund long term care. Therefore, those assets can be preserved for an inheritance for your heirs while also maintaining some access to those funds for your own use.
The list of disadvantages for most long term care funding strategies is long. The disadvantages of using an asset protection trust is no exception.
The main problem is that to take advantage of the asset protection trust for long term care, you must require the care and then run through all of your other disposable assets and become eligible for Medicaid. (Medicare does not cover long term care. Medicaid does, but Medicaid is for low income households.)
And, Medicaid only typically covers a rather low level of care.
Other potential disadvantages include:
- It can be almost impossible to anticipate everything you may need to stipulate in the trust. It will require you to engage with a highly experienced lawyer.
- Medicaid has a 5 year look back period to determine if assets have been transferred. So, setting up the trust must be done well in advance of requiring long term care.
- Setting up the trust can trigger a significant tax bill. (Although, once they funds are in the trust, there can be tax advantages to your heirs.)
- An asset protection trust can be expensive to set up.
Needing long term care is unfortunate. Figuring out to pay for it is perhaps even worse.
The best option is going to be highly personal and dependent on how much money you have and what kind of care you would like to receive and from whom.
If you have significant assets, you will want to consider using your money to self fund care or purchase a Qualitative Longevity Annuity Contract (QLAC) to fund long term care if you require it.
If you don’t have significant assets, your best bet is probably to retain those assets and spend them down if you do require long term care and qualify for Medicaid.
If you are somewhere in between, long term insurance might be a good option, but compare that to the old age / longevity annuity or a QLAC.
Be sure to try out all your long term care options as part of your comprehensive written retirement plan. You can model costs and explore options for paying for long term care with the NewRetirement Retirement Planner.
Additionally, here are 7 ways to plan for long term care.