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Very often I hear from parents that they worked really hard for their assets and they would like to leave those assets to their children. Unfortunately, they tend to believe that the best way to transfer those assets to children is through their Last Will and Testament.
Last Will and Testament
A Last Will and Testament is an after-death document that only governs assets that are held in the decedent’s name alone if there are no named beneficiaries on that account. This option does not take into consideration life events and exposure to long-term care costs. There are many options when it comes to leaving assets for children:
Transfer the assets directly to the children in mom and dad’s lifetime. While this option assures that children will get the funds, it does not take into consideration the effects on long-term care. If mom and/or dad were to need Medicaid nursing home coverage within the 5-year look-back period, these funds would have to be returned. There is no guarantee that those funds will not be spent down by the children. If they are spent down, mom and dad have bigger problems. These funds also run the risk of potential exposure to the child’s bad marriage or credit problems.
Transfer the assets to a revocable trust. This is not the right option if mom and dad are looking to do long-term care planning. This option still gives mom and dad access and control over the assets. While the assets can ultimately be inherited from the trust, if mom and/or dad get sick and need nursing home coverage, the assets in the trust are fully exposed to the cost of care.
Transfer the assets to an Irrevocable Trust. If they are looking to protect assets and ultimately pass them on to their children, this is typically the best option all around. With the transfer and a properly drafted trust, the assets will not be considered an asset of mom and dad’s, even if they need long-term care coverage (once they get beyond the 5-year look-back). If mom and dad cannot get through the 5-year look-back period without needing a nursing home, the assets are in the trust and the trust can be revised in a limited way to allow for the return of the funds to mom and dad so that they can explore other options to protect the funds. Funds in the trust are also not exposed to a child’s bad marriage or creditor problems.
While the plan may seem to be pretty cut and dry, it is very important to discuss your options with an experienced Elder Law Attorney – just in case your family meets any exceptions under the law that would add even more options.