One of the surprising challenges in planning for a spouse afflicted with dementia is the stark reality that should the unexpected occur and the healthy spouse predecease the disabled spouse, the disabled spouse will, in most instances, end up as the sole owner of all of the marital assets. Although there are certainly exceptions, in most cases this scenario represents a disaster for asset protection and preservation for the surviving disabled spouse. Why is this? The answer can best be explained by providing an example so common that it can be found in most communities in America today. Imagine a healthy spouse that has been caring for a disabled spouse at home for many years and by doing so has kept the disabled spouse comfortably in their home environment and out of an assisted living and/or skilled nursing facility. Because of the full-time efforts of the healthy spouse, the disabled spouse is able to enjoy an extended quality of life in a non-institutional environment. As a consequence of this intense effort, the primary focus of the family is the care and well-being of the disabled spouse. Usually, no one considers the possibility that the healthy spouse caregiver could die first. If that happens and the healthy spouse dies with a Will or Revocable Living Trust leaving everything outright to the surviving disabled spouse or
in a general discretionary trust for the benefit of the surviving disabled spouse, then all of the individual and joint assets accumulated during the marriage are now solely in the name of the surviving disabled spouse or are available for the benefit of the surviving disabled spouse, making all of the assets available resources for Medicaid (Maryland Medical Assistance) purposes. In a similar scenario, if the healthy spouse dies first with no Will and there are adult children living, then the surviving disabled spouse will only receive the first $15,000 of the probate assets, plus one-half (1/2) of the remaining probate assets (estate). The other one-half (1/2) of the probate assets goes to the surviving adult children. In either scenario, should the surviving disabled spouse ever need skilled nursing care, all of the assets would be in his or her sole name and would have to be spent down to $2,500.00 or less for the surviving disabled spouse to qualify for Medicaid long-term care skilled nursing benefits. This means that except for certain complicated Medicaid gifting strategies (please contact us for more information about how to save approximately one- half of remaining assets in the event of a nursing home crisis situation), there would be little or no possibility of “Medicaid” asset preservation in such an event as such opportunities would be lost at the moment of death of the healthy spouse.

With this said, not all such scenarios are disasters. Certainly there are many instances after the death of a formerly healthy caregiver spouse where family funds are available to the disabled spouse in sufficient quantity to finance extended periods of private pay assisted living care and subsequently skilled nursing care. Furthermore, those individuals who had the forethought and financial wherewithal to purchase long-term care insurance will utilize policy benefits to finance their care in whole or in part without impacting available funds.

One significant strategy for many families concerns planning for a surviving disabled spouse through the use of a testamentary trust (a trust established by Will at death) for the benefit of a surviving disabled spouse. In this type of planning, we are concerned about preserving marital assets for the supplemental needs of the surviving disabled spouse (should the healthy spouse die first). The Medicaid laws provide for such an exception where a testamentary supplemental needs trust is established by Will (the healthy spouse’s Will). Any assets held by such a trust are not considered to be available resources for Medicaid purposes. Such planning allows the healthy spouse to prevent the potential asset protection disaster described above while preserving the marital assets for the supplemental needs of the surviving disabled spouse and while preserving the Medicaid financial eligibility of the surviving disabled spouse (if so desired by the surviving disabled spouse or their Agent). At the death of the surviving disabled spouse, any assets remaining in the trust can pass to children or other beneficiaries with no “pay back” to or recovery by the State of Maryland. Many families view this kind of planning as an attractive alternative to lifetime gifting and the partial or total loss of control that is sometimes represented by such strategies. Furthermore, many healthy spouses see the use of a testamentary supplemental needs trust as striking the perfect balance between their desire to (1) protect assets for the use and benefit of their surviving disabled spouse, (2) allow for the possibility of further asset protection – preserving some portion of the marital assets for children or other future beneficiaries, and (3) implement planning that will not encumber their current lifestyle.

In summary, through the proper use of a testamentary supplemental needs trust, a healthy spouse can ensure that their disabled spouse will have the use and benefit of the couple’s marital assets accumulated over a lifetime should the healthy spouse die first, all the while preserving the surviving disabled spouse’s ability to financially qualify for Medicaid long-term care skilled nursing benefits, avoiding recovery for Medicaid benefits paid, if any, and providing for surviving children or other beneficiaries after the death of the surviving disabled spouse. If you would like to know more about elder care planning with testamentary trusts, please call us.

** Please note that the planning outlined in this Article is not appropriate for everyone. Asset protection in the elder care context is fact specific and few, if any, family or individual situations are the same. Crisis planning may involve the use of many strategies other than that described above, and pre-crisis planning may involve the use of outright gifts, Medicaid trusts, and other devices. Appropriate elder law planning involves a significant investment of time on the part of the family and the attorney in discussion and counseling.