The Four Pillars of Estate Planning, continued
A relatively new concept, known as the Heritage or Dynasty Trust, solves a relatively new set of planning problems — namely, current divorce rates of about fifty percent and the fact that middle-class people today are leaving gifts of hundreds of thousands of dollars to their children.
Here’s the problem: let’s say after the client dies (or after the second spouse dies, if they’re married) they leave an estate of $500,000 in equal shares to their two children, Bobby and Mary. Now, when Bobby or Mary dies, who inherits the $250,000 from them? The client’s son-in-law or daughter-in-law first. Can they then get remarried and share the client’s $250,000 with a complete stranger? Sure. And with people living a lot longer this is occurring more often.
With the greatly increased size of estates today, in order to protect assets and keep them in the family, many retirees are setting up trusts for their children that (1) protect the assets in the event of a divorce (2) may provide creditor protection, if desired, and (3) while giving the son or daughter lifetime access to income and principal, pass whatever’s left by blood (usually to the client’s grandchildren) instead of by marriage.
Not to be overlooked, but of decreasing importance as estates shrink as a result of economic conditions and exemptions go up due to recent federal legislation, is the use of trusts to save estate taxes for estates valued over $1,000,000 (including life insurance held in the client’s name).
The Second Pillar —
Long-Term Care Protection
Long-term care insurance is preferred since it is the only option that
helps keep clients out of the nursing home — by paying for home
care. We’ve had many clients over the years who were forced to
spend their final days in a facility simply because they ran out of
money to pay for home health aides. Additionally, for married couples,
the home care option may protect the spouse not requiring the care from
compromising their own health and finances with the heavy burden of
caregiving in their later years.
We generally advise clients of the three main options for protecting
assets from the high cost of a nursing home stay — long-term care
insurance, asset transfers to adult children and setting up an Irrevocable
Medicaid Trust.
Since the main objection to purchasing long-term care insurance is the expense, we advise of six ways to reduce the cost. First, the client should look at a hundred day elimination period since Medicare may pay some or all of the first hundred days (to the extent skilled nursing care is required) and, of course, there may never be a claim on the policy. It is really hedging with a bit of self-insurance. Secondly, the daily benefit purchased can be reduced by income from pensions, Social Security and investments, to the extent these items may not be needed by a spouse.
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