Preserving Your Life's Savings

You worked hard to earn a living, take care of your family and like most people, want to pass on something to your family. What do you really have to worry about, and what are the possible solutions? Here are some thoughts.

To begin very few families have to worry about inheritance tax because, except for the quite wealthy, there will be no inheritance tax. That is due to the Connecticut inheritance tax exemption which is $3.6 million dollars, which goes up to $5.1 million in 2020 and $7.1 million in 2021 and $9.1 million in 2022. Also, the federal exemption is $11.18 million and is effectively double that for a married couple. Estate planning with tax trusts used to be necessary, but now, for all but those with significant assets, inheritance taxes are not the problem. Getting sick and needing long term care is the problem.

In Connecticut, the cost of long term care, can easily be over $9,000 per month for home care, and over $16,000 per month for nursing home care. That would wipe out most everyone’s life savings in a very short time. Because of that the Congress passed a law concerning spousal impoverishment that is intended to prevent the healthy spouse from having their life savings wiped out due to the extraordinary costs of long term care.

That law allows a healthy spouse to keep one half of the couple’s countable assets, but not more than $126,420. Then, depending on your circumstances, there are several rules that might apply to your family to preserve the rest of the assets. You can do home repairs, replace your old car, buy prepaid funeral contracts, or even transfer money to a disabled child, or transfer a house to a child who has given the care that kept the parent out of a nursing home for two years while living in the same house. The rules are strict, but if followed correctly, will allow significant assets to be preserved. In addition, the healthy spouse can buy a special annuity called a single premium candidate annuity that for the average family can protect all the remaining money assets. There is a downside to doing that, however, because this law requires that the state of Connecticut Department of Social Services be named as the beneficiary upon the healthy spouse’s death.

Many people do revocable trusts to “avoid probate”, thinking that the assets will be protected, but revocable trusts give zero protection if Medicaid is needed, because if the trust is revocable, it means you can take it back, and if you can take it back, Connecticut quite logically says it is still yours. And since most people don’t have $3.6 million of assets, the revocable trust will not save any taxes, because taxes are zero when you don’t have $3.6 million of assets, whether or not you have a trust.

Here is where proper pre planning can make a world of difference. It is possible to create an irrevocable trust that does not have the parents as beneficiaries. That means the parents cannot receive anything from the trust. This type of trust does not protect assets unless done five years before one of the parents has to apply for Medicaid. But with careful advance planning, all assets put into the trust more than five years before application can be preserved.

There is another situation that can arise if one spouse suddenly needs nursing home care. Often, nursing homes will steer people to a company that offers to do a Medicaid application for the sick spouse. Such a company is not a law firm, cannot give legal advice, and the family may never learn about the spousal impoverishment rules. Every month that goes by without knowing the law and using the rules that were designed to protect the assets for a married couple, and every month that goes by for a single person, may cost the family thousands, or tens of thousands of dollars. And families don’t even know that they might be able to preserve their life savings if they don’t have an advocate to explain what the law allows and how to go about using that law. Pre planning is best, but if pre planning has not been done and the crisis arises for expensive long term care, get the advice you need from an attorney who can explain the laws, help get the care, and preserve as many assets as the law allows.