According to the U.S. Department of Health and Human Services, individuals 65 and older have a 70 percent chance of needing long-term care at some point in their remaining years.
The average cost of a semiprivate room in a nursing home is $6,844 per month, and the average cost for a home health aide is $20.50 per hour.
How can you pay for long-term care? One way is with a trust.
Despite what you might think, trusts aren’t just for the wealthy.
What is a trust?
A trust is a fiduciary agreement between yourself (the grantor) and your appointed trustee (a third party) to hold your assets, such as your house and investments, for your beneficiaries.
Trusts allow you to choose your beneficiaries and decide what assets they get from you and when they get them. Your trustee manages your assets, which belong to the trust once you create it.
When you create your trust, you get to decide what your beneficiaries use your assets for — college savings, retirement income, and so on.
Trusts to pay for long-term care
You can use a trust to pay for long-term care expenses for yourself or a loved one. There are two types of trust for long-term care:
Charitable remainder trusts are tax-exempt irrevocable trusts you transfer assets into in exchange for an income source that can either be lifelong or in place for a specified number of years. You can use this income to pay for long-term care expenses, and once you die, any remaining assets in your trust go to a charity of your choice.
Medicaid disability trusts allow beneficiaries under the age of 65 and living with disabilities to receive funds for long-term care from your assets. Trustees are usually nonprofit organizations, and this type of trust is the only one that won’t affect Medicaid eligibility.
Advantages of trusts
Charitable remainder trusts can give you access to an income source for long-term care while also letting you save on taxes. How?
When you transfer assets into a charitable remainder trust, your trustee sells them without having to pay capital gains tax and then uses the proceeds to invest in assets that produce income.
Since your assets in the trust are sold, they are no longer part of your estate, making your taxable estate smaller. You’ll also enjoy charitable income tax deductions.
The biggest advantage to a Medicaid disability trust is that beneficiaries living with disabilities won’t lose Medicaid coverage while receiving benefits from these trusts.
Disadvantages of trusts
The wrong trustee can mismanage your assets, distributing funds to the wrong beneficiaries for the wrong reasons.
Make sure you choose a trustee you completely trust and who is capable of managing your assets how you want them to be managed.
The benefit you receive from your trust may not be enough to cover the costs of long-term care, especially if you or a loved one needs lifelong long-term care early.
The bottom line
If creating a trust to cover your or a loved one’s long-term care needs sounds appealing to you, work with a certified financial planner to make sure you structure your trust properly.
If you’re not sure whether creating a trust to pay for long-term care is right for your needs, head over to our guide on understanding long-term care costs to learn about other ways you can pay for long-term care.
