© Copyright by Kevin M. Connelly
Hypothetical example: Donald, 75 years old, owns a small farm in Wisconsin and has lived there most of his life. He wants his son who lives nearby to inherit the farm and he signed a Will years ago that says that. Donald is healthy but he knows another farmer who went to the local nursing home late in life and part of his farmland had to be sold to pay for his care. Donald doesn't want that to happen to him.
"I want to keep this farm in the family."
Donald heard it costs over $9000 a month at his local nursing home. Financially, he has cash accounts that he maintains at about $50,000, social security income of $1688/month, and he receives some rent for hay fields that he uses to pay property taxes and insurance. He has no retirement account. It is clear to him that he will need to apply for Medicaid if he ever has a lengthy stay at a nursing home.
Doing some research online Donald found the American Council on Aging website where it said that Medicaid asset protection trusts can cost $2000 - $12,000. That is a lot out of his pocket so now he is wondering if it is worth it to pay for such a trust especially since he is healthy and might never need to go to a nursing home. (The cost of a Connelly Legal Services trust is close to the low end of that range). Should he just keep his Will?
Let's do an expected value analysis to help Donald answer this question. Expected value is a useful statistics formula for estimating a theoretical average return on an investment to decide whether it is prudent to make the investment. In other words it's better than a wild guess. We consider all possible outcomes based on known data: the probabilities someone today over 65 will go to a nursing home, how long his stay will be, and the value of having this trust for each possible outcome. Below is the table I created.
Possible life outcomes: | Donald never goes to a nursing home | He goes to a nursing home for less than 1 year | He goes to a nursing home for 1 to 3 years | His stay in a nursing home is more than 3 years | = |
|---|---|---|---|---|---|
Amount protected by trust: | -0- | $42,900 claim against farm prevented | $187,200 claim against farm prevented | $93,600 against farm prevented EVERY YEAR | |
Probability of person 65 years old for each outcome: | 60% | 17.6% | 12.4% | 10% | 100% |
Expected Value of this trust for each outcome (add all): | -0- + | $7550 + | $23,212 + | $9360 4th year alone = | $40,122 EXPECTED VALUE |
The theoretical average return on investment if Donald gets this type of trust is $40,122 of farm value protection! Even if Donald pays a lawyer an unusually high fee of say $10,000 to create the trust, and even with a 60% chance he will never go to a nursing home, it is still worth the investment. And, indeed, this trust will protect his farm from much larger Medicaid claims if Donald is in fact admitted to a nursing home and resides there a year or more. It's like insurance; you hope you never need it, but if you do you're glad you have it. (Certainly, there are other factors not discussed here for our hypothetical Donald to consider before making this decision).
The additional economic benefit of this trust is probate court avoidance. Donald's son will be able to settle his father's trust without the expenses and delays of going through probate court. This is true whether Donald goes to a nursing home or not.
We will prepare a draft of the trust document in about one week for Donald to review. It will contain terms that reserve the right for Donald to continue living in his house rent-free, that he will pay the taxes and insurance as usual, that all income off the land such as hay field rent shall be paid to him, and upon his death the farm will be given to his son and the trust terminates. The trustee will likely be his son. After Donald and his son sign the trust, we will prepare and execute a deed conveying the farm into the trust which starts the Medicaid 5-year lookback period. The whole process is typically completed in about one month.
Please note that this kind of asset protection advance planning is for those who are relatively healthy because there would be a divestment penalty if the settlor (the person who creates the trust such as Donald) would have to apply for Medicaid within five years of transferring assets to such a trust.
"I have more than $500,000 in a retirement account so I don't need this kind of trust." What if you outlive your retirement savings? Depending on your age and lifestyle you must adjust this type of expected value analysis based on your asset and spending profile in the future to accurately assess the vulnerability of hard assets like a house or farm or savings to long term care costs in your eighties or nineties. Indeed, your financial profile at, say age eighty-five, might resemble our hypothetical Donald.
I would be happy to discuss your estate plan goals. Call for an appointment: 608-634-3956
Kevin M. Connelly
Notes of Attorney Connelly's computations:
1. Spend down calculation: Social Security $1688/month (some deductions are allowed but I’ll use the whole amount):
$9350/month (private pay average nursing home cost in Wisconsin 2023) – $1688/month income = $7662 balance owed per month to be paid by liquidating his assets: $50,000 available cash assets so $7662/month = about 6.5 months that Donald can privately pay before he runs out of assets. After that he applies for Medicaid.
2. Find X = asset protection value per outcome (before weighting with probability): Medicaid rate for the specific nursing home or use state average $7800 x (# months per possible outcome) - attorney fee = x. Note: hypothetical attorney fee not deducted in the above table from each 'x' column as that would be a trivial computation considering the large size of EV.
3. Find Expected Value (average of weighted values of X): Weighted values per x: once admitted 44% stay less than 1 year: 44% x 40% = 17.6%; once admitted 31% stay is 1 to 3 years: 31% x 40% = 12.4%; once admitted 25% stay is over 3 years: 25% x 40% = 10%. Compute theoretical average: E(X) =μ= Σ xP(x): ($7800 x 5.5 months = $42,900) so $42,900 x 17.6% =$7550; ($7800 x 24 months = $187,200) so $187,200 x 12.4% = $23,212; $93600 x 10% = $9360. $7550 + $23212 + $9360 = $40,122 = μ