How to Title Your House To Avoid Probate

When we are working with clients on their estate plan, one of the primary objectives is to assist them in titling their assets so they avoid the probate process after they pass away.  For anyone that has had to serve as the executor of an estate, you have probably had firsthand experience with how much of a headache the probate process is. For that reason, it's typically a goal of an estate plan to avoid the probate process altogether. 

While it’s fairly easy to protect an IRA, a brokerage account, bank accounts, and life insurance policies from the probate process, it has historically been more difficult to protect the primary residence from the probate process without setting up a trust to own the house.

But there is good news on this front, especially for residents of New York State.  As of July 2024, New York allows residence to add a Transfer on Death (TOD) designation to their deed.  Adding a TOD designation is like naming beneficiaries on an IRA account or brokerage account.   Prior to July 2024, residents of New York State were not allowed to add a TOD designation to a deed for real estate, so their only ways to protect their house from the probate process was:

1. Gift the house to their child before they die (Not a good option)

2. Gift the house with a life estate (Ok….but not great)

3. Set up either a Revocable or Irrevocable Trust to own the house

Those three options are still available but now there is a fourth option which is simple and costs less money than setting up a trust. Change the deed on your house to a “TOD deed”. 

32 States Now Allow TOD Deeds

While New York just made this option available in 2024, there were already 31 other states that already allowed residents to add a TOD designation to their deed.  Depending on which state you live in, a simple Google search or contacting a local estate attorney, will help you determine if your state offers the TOD deed option.

What Is The Probate Process?

Why is it a common goal of an estate plan to have your assets avoid the probate process?  The probate process can be expensive and time consuming depending on what state you live in.  In New York, the state that we are located in, it’s a headache.  Any asset that is not owned by a trust or does not have beneficiaries directly assigned to it, pass to your beneficiaries through your will.  The process of moving assets from your name (the decedent) to the beneficiaries of your estate, it a formal legal process called the “probate process”.

It is not as easy as when someone passes away with a house, they just look at their will which list their children as beneficiaries of their estate, and then the ownership of the house is transferred to the kids the next day.  The probate process is a formal legal process in which the court system is involved, an estate attorney may need to be hired to help the executor through the probate process, an accountant may need to be hired to file an estate tax return, an appraiser may need to be hired to value real estate holdings, and investment advisors may be involved to help retitle assets to the beneficiaries. All of this costs money and takes time to navigate the process. We have seen some estates take years to settle before the beneficiaries receive their inheritance.  

How Assets Pass to Beneficiaries of an Estate

There are three ways that assets pass to a beneficiary of an estate:

1. Probate

2. By Contract

3. By Trust

Assets That Pass By Contract

Assets that pass “by contract” to beneficiaries of an estate avoid the probate process because there are beneficiaries contractually designated on those accounts. Examples of these types of assets are retirement accounts, IRAs, annuities, life insurance policies, and an asset with a TOD designation like a brokerage account, bank account, or a house with a TOD deed.   For these types of assets, you simply look at the beneficiary form that was completed by the account owner, and that's who the account passes to immediately after the decedent passes away.  It does NOT pass by the decedent’s will. 

Example: Someone could list their two children as 50/50 beneficiaries of their estate in their will but if they list their cousin as their 100% primary beneficiary on their IRA, when they pass away, that IRA balance will go 100% to their cousin because IRA assets transfer by contract and not through the probate process. Any assets that go through the probate process are distributed in accordance with a person’s will.

Asset That Pass By Trust

One of the primary reasons for an individual to set up either a revocable trust or irrevocable trust to own their house or other assets is to avoid the probate process, because assets that are owned by a trust pass directly to the beneficiaries listed in the trust document outside of the will.   Example: your brokerage account is owned by your Revocable Trust, when you pass away, the assets can be immediately distributed to the beneficiaries listed in the trust document without going through the probate process. The beneficiaries listed in your trust document may or may not be different than the beneficiaries listed in your will.

House With A Transfer of Death Deed

Prior to New York allowing residents to attach a TOD designation to the deed on their house, the only options for titling the house to avoid the probate process were to:

1. Gift the house to the kids before they pass (not a good option)

2. Gifting the house with a life estate

3. Setting up a trust to own the house

The most common solution was setting up a trust to own the house which costs money because you typically have to engage an estate attorney to draft the trust document.  If the ONLY objective of establishing the trust was for the house to avoid probate, the new TOD deed option could replace that option and be an easier, more cost-effective option going forward.

How To Change The Deed to a TOD Deed

Changing the deed on your house to a TOD deed is very simple.  You just need to file the appropriate form at your County Clerk’s Office. The TOD designation on your house does not become official until it has been formally filed with the County Clerk’s Office.

What If You Still Have A Mortgage?

Having a mortgage against your primary residence should not preclude you from changing your current deed to a TOD deed.  Even after you file the TOD deed, you still own the house, the bank still maintains a lien against your house for the outstanding amount, and even if you pass and the house transfers to the kids via the TOD designation, it does not remove the lien that the bank has against the property.  If the kids tried to sell the house after you pass, they would first need to satisfy the outstanding mortgage, potentially with proceeds from the sale of the house.

The TOD Deed Does Not Protect The House From Medicaid

While changing the deed on your house to a TOD deed will successfully help the house to avoid the probate process, it does not protect the house from a future long-term care event.  While the primary residence is not a countable asset for Medicaid, Medicaid, depending on the county that you live in, could put a lien against your house for the amount that they paid to the nursing home for your long-term care.   Individuals that want to fully protect their house from a future long-term care event will often set up an Irrevocable Trust, otherwise known as a Medicaid Trust, to own their house to avoid these Medicaid liens. That is an entirely different but important topic that we have a separate article on. If you are looking for more information on how to protect your house from probate AND a long-term care event, here are our articles on those topics:

Article: Gifting Your House with a Life Estate vs Medicaid Trust

Article: Don’t Gift Your House To Your Children!!

Article: How to Protect Assets From A Nursing Home

Changing the House TOD Beneficiaries

The question frequently comes up during our estate planning meetings, “What if I change my mind on who I want listed as the beneficiary of my house?” With a TOD Deed, it’s an easy change. You just go back to the County Clerks Office and file a new TOD Deed with your updated beneficiary designations. Remember, once you Change the deed to a TOD deed, the house no longer passes in accordance with your will, it passes by contract to the beneficiaries list on that TOD designation.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Gifting Your House with a Life Estate vs. Medicaid Trust

I recently published an article titled “Don’t Gift Your House To Your Children” which highlighted the pitfalls of gifting your house to your kids versus setting up a Medicaid Trust to own your house, as an asset protection strategy to manage the risk of a long-care care event taking place in the future.  That article prompted a few estate attorneys to reach out to me to present a third option which involves gifting your house to your children with a life estate.   While the life estate does solve some of the tax issues of gifting the house to your kids with no life estate, there are still issues that persist even with a life estate that can be solved by setting up a Medicaid trust to own your house.

In this article, I will cover the following topics:

• What is a life estate?

• What is the process of gifting your house with a life estate?

• How does the life estate protect your assets from the Medicaid spend-down process?

• Tax issues associated with a life estate

• Control issues associated with a life estate

• Comparing the life estate strategy to setting up a Medicaid Trust to own your house

3 Asset Protection Strategies

There are three main asset protection strategies when it comes to protecting your house from the Medicaid spend-down process triggered by a long-term care event:

1. Gifting your house to your children

2. Gifting your house to your children with a life estate

3. Gifting your house to a Medicaid Trust 

Gifting Your House To Your Children

Gifting your house outright to your children without a life estate is probably the least advantageous of the three asset protection strategies.  While gifting your house to your kids may be a successful strategy for getting the house out of your name to begin the Medicaid 5-Year Lookback Period, it creates a whole host of tax and control issues that can arise both while you are still alive and when your children inherit your house after you pass away.

Note: The primary residence is not usually a countable asset for purposes of Medicaid BUT some counties may place a lien against the property for any payments that Medicaid makes on your behalf for long-term care services.  While Medicaid can’t make you sell the house while you are still alive, once you pass away, Medicaid may be waiting to recoup the money they paid, so your house ends up going to Medicaid instead of passing to your children.

Here is a quick list of the issues:

No Control:  When you gift your house to your kids, you no longer have any control of that asset, meaning if the kids wanted to, they could sell the house whenever they want without your permission.

Tax Issue If You Sell Your House:  If you gift your house to your kids and then you sell your house while you are still alive it creates numerous issues.  First, from a tax standpoint, if you sell your house for more than you purchased it for, your children have to pay tax on the gain in the house.  Normally, when you sell your primary residence, a single filer can exclude $250,000 of gain and a married filer can exclude $500,000 of gain from taxation. However, since your kids own the house, and it’s not their primary residence, you lose the exclusion, and your kids have to pay tax on the property as if it was an investment property.

No Step-up In Cost Basis:  When you gift an asset to your kids while you are still alive, they inherited your cost basis in the property, meaning if you paid $100,000 for your house 30 years ago, their cost basis in your house is $100,000.  After you pass away, your children do not receive a step-up in cost basis, which means when they go to sell the house, they have to pay tax on the full gain amount of the property.   If your kids sell your house for $500,000 and you purchase it for $100,000, they could incur a $60,000+ tax bill.

Life Estate Option

Now let’s move on to option #2, gifting your house to your kids with a life estate.   What is a life estate?  A life estate allows you to gift your house to your children but you reserve the right to live in your house for the rest of your life, and your children cannot sell the house while you are still alive without your permission.

Here are the advantages of gifting your house with a life estate versus gifting your house without a life estate:

More Control: The life estate gives the person gifting the house more control because your kids cannot make you sell your house against your will while you are still alive. 

Medicaid Protection:  Similar to the outright gift your kids, a gift with a life estate, allows you to begin the Medicaid 5-year look back on your primary residence so a lien cannot be placed against the property if a long-term care event occurs.

Step-up in Cost Basis:  One of the biggest advantages of the life estate is that the beneficiaries of your estate receive a step-up in costs basis when they inherit your house.   If you purchase your house for $100,000 30 years ago but your house is worth $500,000 when you pass away, your children receive a step-up in the cost basis to the $500,000 fair market value when you pass, meaning if they sell the house the next day for $500,000, there are no taxes due on the full $500,000.   This is because when you pass away, the life estate expires, and then your house passes through your estate, which allows the step-up in basis to take place.

Lower-Cost Option:  Gifting your house to your children with a life estate only requires a simple deed change which may be a lower-cost option compared to the cost of setting up a Medicaid Trust which can range from $1,500 - $5,000. 

Disadvantages of Life Estate

However, there are numerous disadvantages associated with life estates:

Control Problems If You Want To Sell Your House:  While the life estate allows you to live in the house for the rest of your life, you give up control as to whether or not you can sell your house while you are still alive.  If you want to sell your house while you are still alive, you, and ALL of your children that have a life estate, would all have to agree to sell the house.  If you have three children and they all share in the life estate, if one of your children will not agree to sell the house, you won’t be able to sell it.

Tax Problem If You Sell It: If you want to sell your house while you are still alive and all of your children with the life estate agree to the sale, it creates a tax issue similar to the outright gift to your kids without a life estate.   Since you gifted the house to your kids, they inherited your cost basis in the property and would not be eligible for the primary gain exclusion of $250,000 / $500,000, so they would have to pay tax on the gain. 

One slight difference, the life estate that you retained has value when you sell the house, so if you sell your house for $500,000, depending on the life expectancy tables, your life estate may be worth $50,000, so that $50,000 would be returned to you, and your children would receive the remaining $450,000.    

Medicaid Eligibility Issue:  Building on the house sale example that we just discussed, if you sell your house, and the value of your life estate is paid to you, if you or your spouse are currently receiving Medicaid benefits, it could put you over the asset allowance, and make you or your spouse ineligible for Medicaid.  

Even if you are not receiving Medicaid benefits when you sell the house, the cash coming back to you would be a countable asset subject to the Medicaid 5-Year Lookback period, so the proceeds from the house may now become an asset that needs to be spent down if a long-term care event happens within the next 5 years.

Your Child’s Financial Problems Become Your Problem:  If you gift your house to your children with a life estate, similar to an outright gift, you run the risk that your child’s financial problems may become your financial problem.  Since they have an ownership interest in your house, their ownership interest could be exposed to personal lawsuits, divorce, and/or tax liens.

Your Child Predeceases You:  If your child dies before you, their ownership interest in your house could be subject to probate, and their ownership interest could pass to their spouse, kids, or other beneficiaries of their estate which might not have been your original intention.

Medicaid Trust

Setting up a Medicaid Trust to protect your house from a long-term care event solves many of the issues that arise compared to gifting your house to your children with a life estate.

Control:  You can include language in your trust documents that would allow you to live in your house for the rest of your life and your trustee would not have the option of selling the house while you are still living.

Protection From Medicaid: If you gift your house to a grantor irrevocable trust, otherwise known as a Medicaid Trust, you will have made a completed gift in the eyes of Medicaid, and it will begin the Medicaid look back period.

Step-up In Cost Basis:  Since it’s a grantor trust, when you pass away, your house will go through your estate, and your beneficiaries will receive a step-up in cost basis. 

Retain The Primary Residence Tax Exclusion:  If you decide to sell your house in the future, since it’s a grantor trust, you preserve the $250,000 / $500,000 capital gain exclusion when you sell your primary residence.

Ability to Choose 1 or 2 Trustees: When you set up your trust, you will have to select at least 1 trustee, the trustee is the person that oversees the assets that are owned by the trust.   If you have multiple children, you have the choice to designate one of the children as trustee, so if you want to sell your house in the future, only your child that is trustee would need to authorize the sale of the house.  You do not need to receive approval from all of your children like you would with a life estate.

Protected From Your Child’s Financial Problems:   It’s common for parents to list their children as beneficiaries of the trust, so after they pass, the house passes to them.  But the trust is the owner of the house, not your children, so it protects you from any financial troubles that could arise from your children since they are not currently owners of the house.

Protect House Sale Proceeds from Medicaid:  If your trust owns the house and you sell the house while you are still alive, at the house closing, they would make the check payable to your trust, and your trust could either purchase your next house, or you could set up an investment account owned by your trust. The key planning item here is the money never leaves your trust.  As soon as the money leaves your trust, it’s no longer protected from Medicaid, and you would have to restart the Medicaid look back period.

A Trust Can Own Other Assets: Trusts can own other assets besides real estate. A trust can own an investment account, savings account, business interest, vehicle, and other assets.  The only asset a trust typically cannot own is a retirement account like an IRA or 401(k) account. For individuals that have more than just a house to protect from Medicaid, a trust may be the ideal solution.

Comparing Asset Protection Strategies

When you compare the three Medicaid asset protection options:

• Gifting your house to your children

• Gifting your house to your children with a life estate

• Gifting your house to a Medicaid Trust

The Medicaid Trust tends to offer individuals a higher degree of control, flexibility, tax efficiency, and asset protection compared to the other two options.  The reason why people will sometimes shy away from setting up a trust is the cost.  You typically have to retain the services of a trust and estate attorney to set up your trust which may cost between $1,500 - $5,000. The cost varies depending on the attorney that you use and the complexity of your trust.

Does A Trust Have To File A Tax Return

For individuals that are using the Medicaid trust to protect just their primary residence, their only cost may be to set up the trust without the need for an annual trust tax filing because a primary residence is usually not an income-producing property.  However, if your trust owns assets other than your primary residence, depending on the level of income produced by the trust assets, an annual tax filing may be required each year.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Don’t Gift Your House To Your Children

A common financial mistake that I see people make when attempting to protect their house from a long-term care event is gifting their house to their children.   While you may be successful at protecting the house from a Medicaid spend-down situation, you will also inadvertently be handing your children a huge tax liability after you pass away.  A tax liability, that with proper planning, could be avoided entirely.

Asset Protection Strategy

As individuals enter their retirement years, they become rightfully more concerned about a long-term care event happening at some point in the future.  The most recent statistic that I saw stated that “someone turning age 65 today has almost a 70% chance of needing some type of long-term care services at some point in the future” (Source: longtermcare.gov). 

Long-term care is expensive, and most states require you to spend down your countable assets until you reach a level where Medicaid starts to pick up the tab.    Different states have different rules about the spend-down process.  However, there are ways to protect your assets from this Medicaid spend-down process. 

In New York, the primary residence is not subject to the spend-down process but Medicaid can place a lien against your estate, so after you pass, they force your beneficiaries to sell the house, so Medicaid can recoup the money that they paid for your long-term care expenses. Since most people would prefer to avoid this situation and have their house passed to their children, they we'll sometimes gift the house to their kids while they're still alive to get it out of their name.

5 Year Look Back Rule

Gifting your house to your kids may be an effective way to protect the primary residence from a Medicaid lien, but this has to be done well before the long-term care event.  In New York, Medicaid has a 5-year look back, which means anything that was gifted away 5 years before applying for Medicaid is back on the table for the spend down and Medicaid estate lien.   However, if you gift your house to your kids more than 5 years before applying for Medicaid, the house is completely protected.

Tax Gifting Rules

So what’s the problem with this strategy?  Answer, taxes.  When you gift someone a house, they inherit your cost basis in the property. If you purchased your house 30 years ago for $100,000, you gift it to your children, and then they sell the house after you pass for $500,000; they will have to pay tax on the $400,000 gain in the value of the house.  It would be taxed at a long-term capital gains rate, but for someone living in New York, tax liability might be 15% federal plus 7% state tax, resulting in a total tax rate of 22%.  Some quick math:

$400,000 gain x 22% Tax Rate = $88,000 Tax Liability

Medicaid Trust Solution

Good news: there is a way to altogether avoid this tax liability to your beneficiaries AND protect your house from a long-term care event by setting up a Grantor Irrevocable Trust (Medicaid Trust) to own your house.  With this solution, you establish an Irrevocable Trust to own your house, you gift your house to your trust just like you would gift it to your kids, but when you pass away, your house receives a “step-up in cost basis” prior to it passing to your children.   A step-up in cost basis means the cost basis of that asset steps up the asset’s value on the day you pass away. 

From the earlier example, you bought your house 30 years ago for $100,000, and you gift it to your Irrevocable Trust; when you pass away, the house is worth $500,000.  Since a Grantor Irrevocable Trust owned your house, it passes through your estate, receives a step-up to $500,000, and your children can sell the house the next day and have ZERO tax liability.

The Cost of Setting Up A Medicaid Trust

So why doesn’t every one set up a Medicaid Trust to own their house? Sometimes people are scared away by the cost of setting up the trust.  Setting up the trust could cost between $2,000 - $10,000 depending on the trust and estate attorney that you engage to set up your trust.   Even though there is a cost to setting up the trust, I always compare that to the cost of not setting up your trust and leaving your beneficiaries with that huge tax liability.   In the example we looked at earlier, paying the $3,000 to set up the trust would have saved the kids from having to pay $88,000 in taxes when they sold the house after you passed.

Preserves $500,000 Primary Residence Exclusion

By gifting your house to a grantor irrevocable trust instead of your children, you also preserve the long-term capital gain exclusion allowance if you decide to sell your house at some point in the future.  When you sell your primary residence, you are allowed to exclude the following gain from taxation depending on your filing status:

• Single Filer: $250,000

• Joint Filer: $500,000

If you gift your house to your children and then five years from now, you decide to sell your house for whatever reason while you are still alive, it would trigger a tax event for your kids because they technically own your house, and it’s not their primary residence.  By having your house owned by your Grantor Irrevocable Trust, if you were to sell your house, you would be eligible for the primary residence gain exclusion, and the trust could either buy your next house or you could deposit the proceeds to a trust account so the assets never leave the trust and remain protected for the 5-year lookback rule.

How Do Medicaid Trusts Work?

This article was meant to highlight the pitfall of gifting your house to your kids; however, if you would like to learn more about the Medicaid Trust solution and the Medicaid spend down process, please feel free to watch our videos on these topics below:

• Video: How To Protect Assets From The Nursing Home

• Video:  Should You Put Your House In A Trust?  

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Why Are Long-Term Care Insurance Premiums Skyrocketing?

Many individuals that have long-term care insurance policies are beginning to receive letters in the mail notifying them that that their insurance premiums are going up  by 50%, 70%, or more in some cases.  This is after many of the same policyholders have experienced similar size premium increases just a few years ago.  In this article I’m going to explain:

• Why this is happening

• Are these premium increases going to continue?

• Options for managing the cost of these policies

• If you cancel the policy, alternative solutions for managing the financial risk of a LTC event

Premium Increases & Insolvency 

 Unfortunately, it’s not just the current premium increases that are presenting LTC policyholders with these difficult decisions. Within the letters, some of these insurance carriers are threatening that if they’re not able to raise premiums by 250% within the next 6 years, that the insurance company may not have enough assets to pay the promised benefit. What good is an insurance policy if there’s no insurance company to pay the benefit?  I won’t mention any of the insurance companies by name but here is some of the word for word statements in those letters:

“This represents a 69% rate increase in the premiums for your policy.” 

“A.M. Best has downgraded its rating of (NAME OF INSURANCE COMPANY) financial strength to C++ in September 2019, indicating A.M. Best’s view that (NAME OF INSURANE COMPANY) has marginal ability to meet its ongoing insurance obligations.”

“Please be aware that as of 06/06/21 over the next 3-6 years we are planning to seek additional rate increases of up to 250% for lifetime benefits”

This creates a very difficult decision for the policyholder to either: 

1. Keep the policy and pay the higher premiums

2. Cancel the policy

3. Make adjustments to the current policy to make it more affordable in the short-term

These Policies Are Not Cheap

 In most cases, these long-term care insurance premiums were not cheap to begin with. Prior to these premium increases, it was not uncommon for a robust policy in New York to cost between $2,500-$4,000 per year, per person.   LTC policies tend to carry a higher cost because they have a higher probability of paying out when compared to other types of insurance policies. For example, with life insurance, they expect you to pay your premiums, you live a long happy life, and the insurance policy never pays out. Compare this to the risk of a long-term event, where in 2021 HealthView Services produced a study that stated:

“An Average healthy 65-year-old couple living to their projected actuarial longevity has a 75% chance that one partner will require a significant level of long term care. There is a 25% probability that both partners will need long-term care” (source: Think Advisor)

Couple that with the fact that long-term care expenses are very high and insurance companies have to charge more in premiums to balance the dollars in versus dollars out.  

With these premium increases now in play, some retired couples are faced with a situation where they previously may have been paying $5,000 per year for both policies and they find out their premiums are going up by 70%, increasing that annual cost to $8,500 per year.

Affordability Issue

 So what happens when a retired couple, on a fixed amount of income, gets one of these letters, and realizes they can’t afford the premium increase. They essentially have two options:

1. Cancel the policy

2. Make amendments to the policy (if the insurance company allows)

Let’s start off by looking at the amendment option.  Many insurance companies, in exchange for a lower premium increase, may allow you to reduce the benefits offered by the policy to make it more affordable.  You may have options like

• Extending the elimination period 

• Reducing inflation riders

• Reducing the daily benefit

• Reducing the maximum lifetime benefit

• Reducing home care options

These are just some of the adjustments that could be made, but remember, you are taking what you have now, and watering it down to make it more affordable. Caution, at some point you have to ask yourself:

“If I reduce the benefits of this policy, will it provide me enough coverage to meet my financial needs should I have a long-term event?”

If the answer is “No”, then you may have to look more closely at the option of canceling the policy.  But what happens if you cancel the policy and you are now exposed to the financial risk of a long-term care event?  Answer, you will have to identify another financial strategy to manage that risk. Two of the most common that we have implemented for clients are

• Self-insuring

• Setting up Medicaid trusts

Self-Insuring Alternative

 The way this solution works is you are essentially setting money aside for yourself, acting as your own insurance company, should a long-term care event arise later in life, you will have money set aside to pay those expenses. If you were previously paying an insurance company $4,000 per year for your LTC policy, then cancel the policy, you would set up a separate investment account where you continue to deposit the amount of the premium payments that you were previously making each year so there will be a pool of assets to draw from should a long-term event arise.

But, you have to run projections to determine how much money is estimated to be in those accounts at future ages to make sure it is sufficient to cover enough of those costs that it won’t put you in a tough financial situation later on. There is an upside benefit to this strategy that if you never have a long-term care event, there are assets sitting there that your beneficiaries could inherit.  If instead that money was going toward long-term care insurance premiums and there’s not a long-term care event, all that money has essentially been wasted.  However, this strategy does take more planning because your self-insurance strategy may be not cover the same dollar for dollar amount that your LTC policy would have covered if a long-term care event arises.

Medicaid trust

 Understanding how Medicaid trusts works is a whole article in itself and we have a video dedicated just to this topic. But the general idea behind the strategy is this, if you have a long-term event and you do not have a LTC insurance policy, you essentially have to spend through all of your countable assets to pay for your care.  Note, the annual costs of assisted living or a nursing home is often $100,000+ per year. For those that do not have assets, Medicaid will often pay for the cost of assisted-living or nursing home care. By setting up a trust and placing your assets in a trust ahead of time, if those assets are owned by the trust for a specific number of years, if there is a long-term care event, you do not have to spend those assets down, and Medicaid picks up the tab for your care. Like I said, there’s a lot more detail regarding the strategy and if you’d like to know more watch this video:

Medicaid Trust Video:  https://www.youtube.com/watch?v=iBVQtrGiUso

Future Premium Increases

 You also have to include in your analysis the risk of future premium increases which seem likely. These letters from the insurance companies themselves state that they may have to increase premiums by a lot more just to stay in business. So it’s not just evaluating the current premium increase in these situations but also considering what decisions you could face within the next 5 – 10 years if the premiums double again. This variable can definitely influence the decisions that you are making now.

Why Are These Premium Increases Happening?

 This is a 20 year problem in the making. For decades insurance companies have miscalculated how long people were going to live and the rising cost of long-term care. Since they weren’t charging enough at the onset of these policies, they have not collected enough in insurance premiums to cover the insurance claims that are now being filed by policyholders. Thus, the policyholders that currently have policies are now being required to pay more to make up for those underwriting mistakes. 

The second issue is that there is less competition in the long term care insurance market. Insurance companies in general do not want to issue policies in a sector of the market where the probability of a payout is high and the dollar amount of the payout is also high; they want to operate in sectors of the market where the probability of a payout is low so they get to just keep your premium payments. Many insurance companies have completely exited the Long Term Care Insurance market.  For example, in New York state, there are only two insurance companies remaining that are issuing traditional long-term care policies. Less competition, higher prices.

The third issue is due to the dramatic rise in the annual premium amounts, they have become less affordable for new policyholders. Many retirees can’t afford to pay $4,000+  per year for each spouse’s LTC policy so the issuance of new policies is dropping; that again, saddles the current policy holders with the premium increases.  

A Difficult Decision

 For all of these reasons, if you are currently a holder of a LTC insurance policy, instead of just blindly paying the higher premiums, it really makes sense to evaluate your options with the anticipation that the premiums may continue to increase in the future.   For those that decide to amend their policy to reduce the cost, you really have to evaluate if the policy covers enough going forward to make it worth continuing on with the policy.  I strongly recommend seeking professional help with this decision. Professionals in the industry can help you evaluate your options because these decisions can be irreversible and the right solution will vary individual by individual.  

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.