Case Studies

A Tale of Two Estate Plans

The majority of estate planners and financial advisors think that EVERYONE should avoid probate. These estate planners and financial advisors recommend that their clients establish flexible trusts to hold all of their client’s assets in order to achieve this goal. As I have written before, there is a large group of individuals who might be hurt if they followed this advice: older married couples who live in Massachusetts. To help illustrate this point, I will use two case studies: The Browns and the Smiths.  Click below to find out how their situation unfolded.

The Browns

The Browns have just celebrated their 50th wedding anniversary. June is 74,Jake is 78. They live comfortably but are not rich. They have their home and about $200k in assets they live off of while retired (their “estate”).They have two grown children, who are able to provide for themselves but do not have the resources to care for them if anything should happen.

June has listened to Suze Orman and other talk show financial advisors and is concerned that if she or her husband were to die that their estate will be consumed by probate. June calls her local attorney, who is not an Elder Law attorney, in order to ensure that she and her husband preserve their assets. The attorney, in trying to accommodate June’s and Jake’s request to preserve their assets establishes a trust to hold their real estate and investments. Jake and June sign all the necessary documents and are relieved to know that they are protected. They have avoided probate.

The following year, Jake’s health starts to fail, he is no longer able to get around without help and June takes on the burden of caring for him. Caring for Jake takes a toll on June. She never gets a break and does not want to burden the children. Besides, June thinks, caring for her husband is her responsibility. Eventually, June’s focus on Jake instead of herself results in June being rushed to the hospital. June is conscious initially, but she is too weak and after a week or two, dies.

Jake is now in need of 24 hour care and the children are brought in to solve the crisis. A nursing home for Jake is found and he is admitted. The facility explains that for Jake’s care the cost will be $400 per day and asks, “How will this be paid?” The children panic. They can’t afford to pay it and they are not in the position to care for Jake. Luckily, June and Jake have $200k that they have been able save over their lifetime and the children use that to pay the nursing home. They use some of the money to fix up the home and sell that too. They worry. What happens when the money runs out? They meet with the billing office of the nursing home who lets them know that there is nothing to worry about, when Jake is down to his last $2,000 they will apply for Medicaid for him, at no cost. True to their word when Jake is down to his last $2,000, after paying the nursing home for the last 2-3 years, the nursing home applies for Medicaid for Jake which now pays the nursing home bill. However, the family still needs to pitch in, to pay for things that Medicaid will not cover, like extra clothes, dental appointments, eyeglasses, etc. There is nothing left for anyone else when Jake dies. The children have to pay for the funeral.

The Smiths

The Smiths lived next door to the Browns until the Browns had to sell their home to pay for Jake’s care. They saw what happened and wanted to prevent that from happening to them. The Smiths are very similar to the Browns, they too have just celebrated their 50th wedding anniversary. April is 74, Arthur is 78. They live comfortably but are not rich. They have their home and about $200k in assets they live off of while retired (their “estate”). They too have two grown children, who are able to provide for themselves but do not have the resources to care for them if anything should happen.

April decides that they need to be proactive and contacts a qualified elder law attorney to help them plan for the possibility that one or both of them may need nursing home care. The elder law attorney says that there are several things they can do. But the elder law attorney does NOT recommend a living trust. Instead the elder law attorney recommends that they both do new wills that each contain a trust for the benefit of the spouse. So April’s will has a trust for Arthur’s benefit and vice versa. The attorney explains that using a trust inside of a will has the ability of protecting the assets of the deceased spouse should the surviving spouse need a nursing home. The attorney explains that since no one knows who will die first, the first step should be to make sure that each of them have some assets in their own name. The attorney prepares new deeds so that April owns half of the house and Arthur owns the other. The attorney tells them to set up separate bank accounts, one is in April’s name only and one in Arthur’s name only, and to split all of their other financial assets. If April or Arthur had life insurance policies or retirement benefits, the attorney would also have reviewed with them the advantages and disadvantages of naming the estate as the beneficiary instead of the spouse. April, who also listens to financial advisors on the radio and TV, asked skeptically, “But won’t that mean we will have to go through probate?” The attorney says, “Yes, but I can assure you that the cost of probate, under these circumstances will never come close to the cost of a lengthy stay at a nursing home.” April and Arthur, apprehensively sign their new wills and do no further planning. The attorney says, “If either of your health changes significantly, call the office immediately, we may be able to protect more than half of the assets from nursing home costs.”

A few months later, Arthur has a stroke. At first Arthur is conscious and can make decisions but the doctors cannot stop the bleeding and are afraid that he will lose capacity and die soon. April remembered what the attorney said and called the lawyer’s office right away. The attorney said that since death looks imminent for Arthur, April could give her assets to Arthur before he dies and those would be protected, too. April goes to the attorney’s office the next day and signs a deed conveying her half interest to Arthur. Arthur dies a few days later. Although April is apprehensive, April deposits a significant portion of her assets into Arthur’s bank account keeping only enough for her to feel comfortable until she is appointed the Personal Representative of Arthur’s estate and to pay immediate bills (about $30,000). April probates Arthur’s estate and the testamentary trust is set up and funded. April at times gets frustrated with how long it takes to get things done through the probate court, but once she is appointed, there is very little court interaction thereafter. Her son is appointed the trustee of the trust for April’s benefit contained in Arthur’s will. Again it takes some court filing to get this but afterwards, there is little court supervision. All the while, April continues to live in the home and uses the money she has set aside in her name to pay for things. If she needs something special, the trustee in Arthur’s will gives her the money to buy it or buys it in the name of the trust. Sometimes this seems so unnecessary and April questions whether she did the right thing, especially when she gets the bills that show that she has paid about $6,000 in probate costs.

April eventually needs care that she cannot get at home and must leave her home for a nursing home. They have looked around and found one, but it costs $400 per day. How can she afford this? To help her with this, April meets with her attorney and her trusted son, who is also the trustee of the trust in Arthur’s will to discuss how the nursing home will be paid. The attorney reviews the assets in April’s name alone. April is down to about $10k and the attorney recommends that April prepay her funeral and that should reduce her assets so that she can immediately qualify for Medicaid. The attorney reminds April that the assets in Arthur’s will are protected and thus no further planning is needed to protect these assets. April asks, “What about the 5 year disqualification period?” The attorney reiterates that because the trust for her benefit was set up in Arthur’s will, it is subject to special rules that protect all the assets that went through probate and are now in the trust. There is no 5 year look back period or disqualification period and April can receive the benefits of the trust without it jeopardizing the rest of the trust assets. For the first time, April sees the real value of having gone through probate.

April follows the advice of the attorney and prepays her funeral, now that she has less than $2,000 in her own name she can apply for Medicaid. April qualifies for Medicaid and Medicaid starts paying for the nursing home expenses. The trustee monitor’s April’s situation and buys her the things that Medicaid won’t pay for. As the bulk of April’s expenses are now being paid for by Medicaid, the trust assets are not reduced very much at all, maybe $2,000 to $3,000 per year. After about 5 years in the nursing home April dies. At her death, the assets remaining in the trust such as the home and about $150,000 are available to April’s children. April has already prepaid her funeral so those costs are not a burden to her children. In the end, April did not burden her family with her funeral debt and was able to leave them a significant bequest: all because she was willing to go through probate when Arthur died.

In Summary

As these two case studies show, going through probate can be a significant benefit and is not the threat to wealth that it is portrayed to be. No doubt it can be more expensive initially, but the cost savings can be significant if the surviving spouse needs a nursing home. To put it in perspective, April Smith spent less than one month’s worth of nursing home costs in probating Arthur’s estate, and in doing so protected her house and about $150,000 as the legacy she could pass on to her children. The Browns, in contrast, lost everything in their effort to avoid probate.