Your Independence, Rising Medical Costs and Retirement

 Compliments of The Hayes Law Firm: Estate Planning, Probate, Medi-Cal Trust, and Elder Law Attorney

Written By: The American Academy of Estate Planning Attorneys (William K. Hayes)

Many of us believe we have the “planning for the future” space covered. We’ve worked hard and saved. Our homes are paid off by the time we go into retirement and as far as we’re concerned, life now consists of living well in the way we define. In a perfect world, that’s true. In reality, there are a few things which can quickly annihilate our sense of independence. Planning is key, but knowing precisely what you need to plan for is crucial.

It’s not uncommon to hear stories like this: A woman shares a tale about her closest friend whose husband had passed away a few years earlier. She tells of her friend’s loss and grief and the many things she’d begun to do as she learned to live her life without her husband by her side. Her friend was able to travel, visit old friends and of course, visit her children and grandchildren. During one of her trips, she became quite ill. After spending an extended period of time in the hospital, her family was told that she would need long-term care in a nursing home. The doctors said it wouldn’t be a permanent scenario, but this type of long-term care was crucial for a full recovery.

The Harsh Reality of Medicare

The belief was that Medicare would cover these expenses. However, the family soon learned that not only did Medicare not cover any of her nursing home expenses past 100 days, but there were also considerable copays after the first 20 days. Further, she and her family learned that the costs of the nursing home would come to more than $8,000 each month. Up until then, the woman was sure all of their planning had sufficiently covered their bases in such a way that they would never be reliant on their children. Instead, this medical emergency cost her the entire life savings and before long, she had no assets, which meant there would be nothing to leave her children and grandchildren.

This woman was now worried because she and her own husband had followed a similar path for their after-retirement planning. She especially wondered what she could do to prevent this same fate of her friend.

Medi-Cal Income Only Trust

When applying for Medi-Cal, the applicant must not have more than a certain amount of assets. In most states that limit is $2,000. In addition, there are certain assets which are exempt and not countable resources, such as the primary residence, up to limits set by the state, but in no event less than $500,000 of equity. If you put money into a Medi-Cal Income Only Trust, those assets are not countable resources. However, you have to plan in advance because a transfer within five years of when you apply for Medi-Cal can incur quite substantial penalties. The Medi-Cal Income Only Trust is an irrevocable trust where the person transferring the money into the trust no longer has rights to the principal, but has rights to the income. The principal is retained in the trust and administered for the beneficiaries you determined, typically your children, on the terms you set up. The income is paid to you. If you need nursing home care, the income may go toward medical expenses, but the principal is safe from the medical expenses.

In addition, had the woman’s friend incorporated a Medi-Cal Income Only Trust, she and her family wouldn’t have faced a steep $8,000 monthly nursing home cost. Even though most of her income would have gone towards her medical care, the remaining balance would have been picked up by Medi-Cal

This cautionary tale is meant to convey that with just a bit more planning, you too can better preserve your resources while planning for the unexpected and not allowing your family to shoulder the financial burdens. Discuss your options with a qualified estate planning or elder law attorney can help you plan to preserve your financial independence in the best way for you.