As families look to retirement, they typically have two major concerns: paying unnecessary taxes, and getting hit with the high cost of long-term care.
However, there are things that a family can do to try to protect themselves from this two-headed monster. To provide shelter from long-term care costs and unnecessary taxes, the family can put together a retirement game plan that takes into account legal, financial and tax planning.
Create An Asset Protection Trust
The first step for protection can be to create an asset protection trust, which, once funded, can protect against the cost of nursing home care. The way it works is that once assets are moved into the asset protection trust, it starts a five-year race, after which time everything inside of the trust is protected from the costs of nursing home care, which can run upwards of $8,000 per month. Medicaid can help pay for the cost of long-term care; however, Medicaid looks back five years. If any assets were moved around or gifted, then there will be a penalty. Also, in most states, Medicaid only allows the individual to keep $2,000 worth of countable assets. So, by moving assets into an asset protection trust, the family can have Medicaid pay the cost of nursing home care, and everything inside of the trust can be used to pay for additional services. For a married couple, if one spouse needs long-term care, the healthy spouse will have the ability to pay for that care.
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Potential Issues With Investing
Once the trust is established, the next question is how to invest inside of the trust. One option would be a common brokerage account, with money invested in the market. The problem with this is twofold. First, money that’s invested in a brokerage account is taxable. This means that if there is growth on the account, that growth will be taxed at capital gains rates. Many people want or ask to put their Roth IRA into the trust to grow tax-free. Unfortunately, this is not an option because a Roth is a qualified account and cannot be owned by a trust. It is important to look for tax-free growth strategies because even if there are no changes in law or tax code, taxes are scheduled to go up in 2025. So, it may be better to pay the tax now rather than later. With a tax-free account, you are taxed on the seed, not the harvest.
The second problem is that if the money is invested in the market, there could be volatility. So, even though the money is protected from the cost of long-term care, it’s not protected from downturns in the market. For example, let’s say a family moves $300,000 into an asset protection trust and invests it in the market. If the market drops 10%, then even though the family is trying to protect their assets, they’ll lose $30,000 due to market downturns.
Other Investment Options
An option for investing inside of the trust would be indexed universal life (IUL) insurance. With an IUL policy, the money invested can grow tax-free, meaning that you can invest post-tax dollars and allow the policy to grow. Plus, because this is an indexed product, if the market goes up, you participate in the upside of the market, but if the market goes down, you don’t lose anything. So, by utilizing an IUL, you can protect against market volatility, while creating a tax-free retirement income source.
Date: September 20, 2019