In my first article on this topic, I wrote about the concept of using an Irrevocable Trust to protect assets from being used to pay for nursing home expenses. In this article, I want to explore this issue a bit further and discuss the ideal timing for the use of an Irrevocable Trust.
Estate planning attorneys use the term “divestment” to refer to the process of transferring a home to an Irrevocable Trust. Under current law, a divestment must take place at least five years prior to applying for Medicaid benefits for it to effectively shield an asset from being used to pay for nursing home costs.
This five year look-back period is extremely important in determining when to divest. While we take a variety of factors into account when determining the appropriate timing, there are a few general rules to keep in mind.
Most clients do not have a long-term stay in a nursing home prior to age 80. While a client might have a hip or knee replaced and go to a facility for two weeks of rehab and therapy, we generally don’t have to worry about long-term stays in a facility until later in life.
In order to have an asset protected by age 80, we need to start the divestment process when that client is 75 years old. For this reason, I generally recommend that clients start looking into their divestment options in their early 70s, as that gives us plenty of time to decide whether they are a good candidate for divestment planning.
Some clients want to divest their home significantly earlier on in life. While it may make sense for a 55 year old with a family history of early onset dementia, it does not make sense for the vast majority of younger clients to divest their assets.
As we discussed in my prior article, divestment is a one-way street. We don’t want to divest assets that a client may need later on in life to fund their retirement. By the time someone is in their early 70s, they generally have a fairly accurate idea of what they are spending each month in retirement and whether they will need to sell a particular asset to fund that retirement in the future.