Make It Last – Ep 40 – Three Concepts, Simply Explained: Medicaid Planning, Annuities, & Trusts
In this episode, Victor launches a new segment called “Three Concepts, Simply Explained”. He will cover three complicated topics and try to explain them in 8 minutes or less. This week, the three concepts are: Medicaid planning, Annuities, and Trusts.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Private Client Capital Group.
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Announcer: Welcome to “Make It Last.” Helping you keep your legal ducks in a row and your nest egg secure with your host Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Hey, everybody. Welcome back to Make It Last. I am your host Victor Medina. I am so glad that you could join us here this Saturday morning on another fun episode of Make It Last. In fact, I’m really excited because this week we’re going to be debuting a new feature, a new kind of show.
Once a month what I’m going to do is I’m going to take three concepts and explain them. Three complicated things and do my very best to explain them to you in a simple way in our eight‑minute segments. We’re going to call this “Three Concepts Simply Explained”. This is the first one of those shows.
This week, what we’re going to do is we’re going to take…To give you a little idea, we’re going to take Medicaid planning, we’re going to take trusts, and we’re going to take annuities this week. Those are pretty complicated things. I’m going to do my best to try to explain them to you in just about eight minutes each of a segment. Let me not waste any time.
Let me jump right into Medicaid planning. I’ve got about seven minutes to do this. Medicaid planning, for most people that are unaware, Medicaid isn’t just a system to pay for long‑term care where it’s only for the poor.
Many times, Medicaid planning ends up being a way to help safeguard assets for somebody that becomes in need of care, and they’re looking to keep flexibility on their kinds of care.
They’re trying to keep their spouse in the same kind of position that they were before they got sick because the Medicaid rules are complicated, and they require both parties to essentially become poor, destitute, before they’ll step in and pay for care. When you kind of think about it, that’s not really fair.
If you took two twin brothers and one of them had saved diligently their entire life, owned a home, no debt, nothing wrong financially, did all the right things and you took the other brother, and he had declared bankruptcy three times, and he’d run up huge credit card bills, and didn’t own anything to his name, never was responsible and bought a home, which one gets on Medicaid first?
It turns out that the irresponsible brother is the one that gets Medicaid, gets his care paid for, and the person that acted so well, they’re going to be required to spend down their money first. It’s not really a fair system, especially when we talk about caring for our elderly, and making sure that they have the care that they need.
When you think about how it can impact a surviving spouse or a spouse that’s not sick, requiring them both [laughs] to get poor is not really a great system. It’s the one that we have, but it’s not a great system. The idea here is that we’re trying to proactively plan for the need for long‑term care.
I’m going to focus in this Medicaid planning section on what we call pre‑crisis planning or planning ahead of time. This is really helpful for folks that are on the margin of having enough money to be worried about it, but not having so much that their best long‑term care plan is to get a room at the Ritz, and get room service, and hire in the help.
If you’re extremely wealthy, this doesn’t apply to you. If you’re on the margin, anywhere between about $300,000 in value to a million, a million‑and‑a‑half of net worth, those people were just the better majority of folks that are facing retirement or in retirement. This kind of planning really is for you.
The best thing that you can do is you can proactively plan because planning reactively once you’re already sick is difficult and not as beneficial. You won’t save as much money. The idea on Medicaid planning is this.
The rules that generally require that you give five years’ worth of your last financial transactions ‑‑ every bank statement, all of tax records ‑‑ because, essentially, Medicaid says that you cannot artificially impoverish yourself and give away everything in the last five years in order for you to become qualified for Medicaid there.
Let’s say anything that you did in those last five years would essentially be only for the purpose of qualifying for Medicaid. Therefore, they’re not going to let you do that. The concept of pre‑crisis planning, simply explained, is we take that five‑year rule and make it work for us.
We say, “Look, if you’re going to penalize for the stuff that we do within the last five years of our application when we go and apply, we’re going to go further back than that.
What we’re going to do is we’re going to structure our assets in a way that allows us to get access to them, keep them protected, and get great tax planning on them, but we’re going to do that more than five years before we apply for Medicaid benefits. When you think about that, that’s a hard date to pick out of there. We don’t know exactly when we’re going to get sick.
People asked me, “When’s the right time to do planning?” I say, “Five years and one month before you go into the nursing home.” They chuckle because we don’t really know when that’s going to happen.
The sooner we get started on that the better because the whole concept on the planning is to take our assets and rearrange them in a way that makes them not countable for Medicaid, doesn’t cause tax consequences that would make us not want to do planning, keeps them accessible to us, but we do it all more than five years before we intend to get benefits.
This asset protection planning is very powerful because it works right into the federal law about what we can do. There are all kinds of wrinkles to that. We use a lot of trusts. We use a lot of financial products in there. We use structured things in a way that, once you get in and underneath the hood, there are a lot of moving parts.
It is really just a car and the car is ‑‑ take the stuff, move it out of your name, wait five years, be eligible for benefits. That planning is very attractive to people, depending on where they are in their retirement journey. If they’re very early, 60, 65, it seems a little premature to do this unless somebody’s diagnosed with some sort of illness.
When you get a little further along, when you’re in the beginning 70s or so, now’s the time to seriously be considering this. Once you get 80, you are flirting with whether or not you’re actually going to be successful.
By the time you get into your mid‑80s, the chances that one or both of you will actually go five full years before needing any long‑term care, those chances aren’t as great as when you were younger. This five‑year planning is something that we routinely do in our office. We see a lot of clients that just add this to their base level estate planning as a hedge against the future.
Many times, we just start with protecting the home, which is a pretty difficult asset to protect otherwise because the home is a liquid. I can’t just cash in the home and use it to spend for care, even if I wanted to. That takes time. It takes effort. It threatens whether or not somebody can live in there.
Creating this kind of plan where you were just taking the home and were you’re starting with that and hoping for five years is a routine part of what we’re doing with our planning for these folks that are in retirement and already looking to protect these assets.
Then, as we get a little further on, we might add money. We might take a second bite at the apple and try to save some more funds. That’s the idea behind this planning, is essentially use the rules to our advantage.
Victor: The rules say that Medicaid can’t look at any asset transfers that occurred more than five years ago. With that, we have Medicaid planning simply explained. Let’s take a break. When we come back, we have two more topics to go through on this little concept that I have going on here.
We’re going to talk about trusts, and we’re going to talk about annuities. It’ll seem like really complicated stuff, but we’re going to go eight minutes. I’m going to explain to you really simply. We’ll be right back on Make It Last. Stick with us.
Victor: Hey everybody, welcome back to Make It Last. We’re talking about three concepts simply explained. The goal here is to try to take three complicated things, things that most people have questions on and wondering if they’ve got the right information. We’re going to try to explain to them in eight or nine minutes, depending on how long I go on the segment.
The idea here is really to take these complicated things and be able to distill them in a way that makes you comfortable talking about them at a dinner party. You say, “Look, I understand this. Let me explain it to you.” You don’t have to tell them that you learned about it on the Make It Last show. This will be your little secret. We’ll share the secret together. I promise not to out you.
If I see you out in public, I’ll say, “Actually, you learned it from the Make It Last show.” We’re going to go into annuities next. Annuities are the investment that people talk about more, I think, than anything else these days. The reason for that is that they are sold and sometimes mis‑sold out in the community for retirees.
The whole concept behind them, the pitch that comes along is this is the way where you can safeguard your assets. This is a way of protecting them. You’ll hear all of the pitches that say, “Well, are you worried about having enough in retirement? Well, here, you need to buy an annuity.”
The idea is that the people that sell annuities, they get paid commissions based on the fact that they’re selling annuities, first, and then, second, the more bells and whistles that they put on them, the higher their commission goes. We want to be a little bit suspicious any time that we hear an annuity as a recommendation for retirement.
I want to be careful here because there are a lot of our clients that have annuities, annuities that we have recommended. Annuities are like electricity. It’s value neutral. You can either use electricity for good or for bad, but it’s value neutral.
The real idea is, how are you going to use this investment? When we use them, we use them as part of a plan. We don’t use them as the answer to all of our clients’ problems. In fact, we don’t recommend the same annuity over and over again. We don’t recommend it for the same purpose. Each one of the recommendations that we have are tailored for our clients.
It’s important to make sure that we are using them in the right fashion. I guess, if I had to summarize it, be suspicious anytime anybody else offers [laughs] you annuity, but trust when we do it. The reason for that is that we’re fiduciaries, and we’re fiduciaries through and through. We can only recommend investment products and solutions that are in our client’s best interests.
People that are just insurance agents and that’s all that they have might be nice people. They might help you take the groceries out and put them in your car, but they’re not bound to you in terms of making everything in your best interest. They’re just not held to that standard.
The idea with annuities, on that little rant, is it’s essentially an insurance product, and that insurance product is a trade‑off because most insurance works by pooling your risk with other individuals. We take the law of big numbers and we use it to our advantage.
The insurance company uses it to its advantage to make a profit and you use it to your advantage to take the idea that the big numbers…Essentially, you can use some people’s [laughs] bad fortune to fuel your better fortune. Here’s the way that it works. Annuity, by its definition, is nothing more than a structured payment over your lifetime. It’s basically even payments over your lifetime.
When you think about an annuity, while there are different flavors, they all boil down in essence to an investment strategy that says, “I’m going to take a trade and that trade is I’m going to give the insurance company my money in exchange for a right to get money from the insurance company for the rest of my life.”
The way that the insurance company can make this promise in a way that would be advantageous to you is by them pooling your life expectancy with everybody else’s. What you get is this concept called mortality credits.
Mortality credits is nothing more than the idea that, because somebody died earlier than expected, we don’t have to pay them as much. Therefore, we can reallocate their money to the people that live longer. When you think about an income annuity, specifically the right to get paid income for the rest of your life, that’s essentially what it boils down to.
That’s all an annuity really is. It has to have that at the core of every contract, “Is this right for basically lifetime payments?” Now, what gets complicated in this is that, in order to make this an attractive investment for people, they have to layer the contract with sizzle.
The sizzle can be anything related to credits for their money to grow. It can be an additional premium bonus where you get more money just upfront for putting your money into that contract. It can be a tax deferral. It can be a death benefit.
What ends up happening is that it gets complicated because the companies, in order to one up one another, basically trade all of these different contract riders in order for you to buy their product over somebody else’s.
Sometimes, if I’m treating the insurance companies generously, those contract benefits actually help my clients, because some of my clients are more interested in one thing over another.
When we think about the idea of a deferred annuity that is indexed for growth, ‑‑ lot of technical terms on there ‑‑ generally the idea is we are pooling our risk and letting the insurance company do what it does in order to protect principal and share in some of the upside of it.
I don’t think I did as good a job on that one, so let me try that again. Essentially, what you’re doing is you’re saying, “Look, insurance company, you have a little bit more power to buy these options and different things inside of an investment product, but the idea is, if you are successful in getting some credit that you can apply to the value of my account, I’ll trade some of that with you.
“You keep some of it, I keep some of it, but you bear the risk that, if the investment doesn’t work out, essentially I don’t have to suffer any loss on it.” That strategy actually works pretty successfully. There are definitely times where it’s the right structure for somebody, but it doesn’t, I don’t know, go against.
It doesn’t threaten the definition that basically says that annuity is just an exchange of money for the income right because, at the end of the day, those are all included in there, so you want to think about an annuity largely as a way to protect principal and to generate income.
Thinking about it as an investment that’s going to grow is probably not the right way to approach it. It is a risk‑free investment and, as long as you are willing…Excuse me, I should be clear about this. There are things called variable annuities, which we don’t like all.
In fact, there’s a chapter in the book that I wrote called, “Make It Last ‑‑ Ensuring Your Nest Egg Is Around As Long As You Are.” There’s a chapter in there that says that variable annuities are the scourge of the earth because they are. There’s no brand‑new variable annuity that’s worth buying and I will debate anybody on that.
There are other annuities ‑‑ fixed and indexed annuities ‑‑ that are attractive in a retirement plan for somebody because of the way that they allow you to protect principal. The fixed and the indexed annuities, they will never lose their value unless you load them up with a bunch of riders. They’re not going to lose their value. The variable annuity can lose its value.
It’s actually a really terrible investment product. It has really no place in a portfolio. The other two though, that’s a good risk‑free way, and as long as in a fixed and indexed annuity, you are willing to get zero, get nothing credited in a particular year because the investment didn’t perform.
If you are comfortable with the worst you can do is zero, and you might do that a few years in a row, but it’s protected, that’s not a bad trade. That’s not a bad trade. We do want to safeguard some of the stuff and lock it away to say, “Look, I want to be able to count on that being there for the rest of my life, that it’ll never decrease in value.”
Then, similarly, you might be able to turn that into an income stream, but, at the end of the day, I suggest that there’s nothing that violates the idea that every annuity is essentially the trade of money for an income right where you are pooling mortality credits.
I’ll wrap up with this. I’ll wrap up the way kind of that I started, which is you do have to be wary of the pitches for annuities as a solution for all. If it sounds too good to be true, it likely is too good to be true.
You want to make sure that if you’re discussing the annuity, the first thing, the very first thing that you want to do is make sure that that adviser is willing to sign a fiduciary pledge saying that whatever they recommend is in your best interest. Most of the time, like a foul smell, it will drive them running because they know they can’t be held to that standard, and you will be safe.
Anybody else that still is in the room after you honor that statement, you can continue talking to because they’re probably doing things the right way. You still want to be able to ask all of the questions that you would otherwise have about annuities as I suggested.
They have a place in the solutions that we craft for people from time to time. They are a good solution, in many cases, for folks that are looking to segment out what their retirement looks like. That there’s some that’s protected, there are some that’s income. We even use them as solutions to get out of bad annuities. Just trade them, which you’re allowed to do as well.
Victor: They have a place, but it’s not as a solution for absolutely everybody. You should keep your head on straight. That’s annuity simply explained. When we come back, we’ll cover trusts. That will be the very first show of “Three Concepts, Simply Explained.”
By the way, I’d love to hear back from you. Tell me whether or not you like this format. It’s an experiment on our end. There’s nobody really clamoring. [laughs] I made it up me. Let me know what you think. We’ll be right back with Make It Last. Stick with us.
Victor: All right, everybody. Welcome back to Make It Last. We’ve been talking about Three Concepts Simply Explained. We talked about Medicaid planning. We talked about annuities. Now we are going to wrap up with one of my favorite, favorite topics of all time. They are trusts.
I’ve spent my career talking to folks about estate planning. I’ve been pretty consistent since the beginning recommending trusts as the vehicle for almost every plan. The trust is essentially a great Swiss Army knife. Last segment, when I said that annuities should not be a solution for everybody, trust almost always should be a solution for people.
You’ll note that I will not talk about this in terms of net worth. We’re not looking at trust‑based planning as indicated for people with so much money, but not indicated people that don’t have a lot of money. The reason why it is the right solution regardless of your net worth is because of the idea behind the trust.
Once you understand what it is and what you can use it for, you realize very quickly that the benefit is not simply from a financial standpoint, like what you can do to save on taxes or how much money you have. It’s an organizational tool.
Over the course of my career, I’ve tried on different ways of explaining it. I’ve explained that trust is a refrigerator. You put your stuff in the refrigerator. You put some instructions on the outside. Then it tells you what to do with the food on the inside.
I’ve used the concept of boxes and buckets. That’s my favorite lately because it helps people understand that it, in fact, is an organizational tool. I’m going to use the box and bucket metaphor for you to understand a little bit more about trusts so that they don’t seem as scary when they’re recommended.
The nice thing about what we do in our office is we don’t price differently based on whether you get a trust or some other format. If people come in and say they absolutely need a will, I say, “Well, it costs the same.”
We charge one fee for planning, regardless of what the solution looks like, because what you’re buying is the end result. If you want a slightly different way of getting there, go for it. Our recommendation is to do it one way. Regardless of which recommendation you take, it costs the same.
Once we explain that the planning costs the same, regardless of what the format is, the structure ‑‑ whether it’s a trust, a will, or anything else ‑‑ people very quickly gravitate to the idea of using a trust. We spend a lot of time in that first meeting explaining trusts.
In fact, we’ve got a whole video series for anybody that makes an appointment with us that they watch that explains concepts of trusts in a four‑ or five‑minute video so that they understand a little bit more about it before they get into the meeting because it is a strange concept for most folks. They don’t have a lot of experience with it.
If they have experience with it, that’s the experience that says, “Look, it’s a thing for rich people.” That’s the best that they can do to help explain it. For us, the way that it works is I want you to think about a trust essentially as an organizational tool. Think about it like a box with an open top. That’s basically a revocable living trust.
The way that it works is that you have a lot of cats that are running around in your life. Yes, I said cats. You got cats running around in your life. These are your investments. These are your assets.
This is not bad for you because much like a person that has a lot of cats, they actually know where all the cats are, and whether or not they have all the cats in front of them. You’re a cat person, you got your cats under control.
The problem is that you might have the cats under control, but the non‑financially savvy spouse, the one that didn’t take on responsibility for finances, they might not know where all the cats are. Your kids may not know what all the cats are.
What you need to do is to do some work like a responsible adult. What you need to do is take some work, collect your cats, and put them in one box so that you know that when the time comes to give over responsibility for managing what’s going on you can just give them the box.
You don’t have to tell them, “Well, look, there’s a cat over here and a cat over there. I have about 15 or 20. Look for some statements that might come in the mail. I’m not really sure where they’re all organized.” You can just give them the box. You’ll have confidence that everything is inside of the box. The work of herding your cats has been done by you ahead of time.
If you have everything inside of one box, it’s pretty easy to use that in a way that is to your advantage. You can, for instance, during your lifetime, if you become incapacitated, give some instructions about what’s supposed to happen to everything in the box at once. You can make sure everything is managed through the box.
You can tell who’s going to be in charge and who’s going to be in charge after that. It’s a simplification of your estate back down. Notice, I didn’t talk at all about the size of the box. This has nothing to do with net worth. We’re using a box that’s the appropriate size, whether you have somebody with $300,000 or $30 million.
We’re still using the box because the advantage of the box is it’s an organizational tool. Yes, there are different trusts besides the open‑top box, which is a revocable trust. You can have an irrevocable trust. You can start to layer some complexity. Basically, an irrevocable trust is just nothing more than a box with a lid on it, where you can’t take the stuff in and out.
There’s all kinds of wrinkles to that. Whether or not you’re using the irrevocable trust for Medicaid planning, or state tax planning, or anything else, there are some complexities to that, but the trust is just the holding container. It dates back to feudal times.
Trusts have been around since the 1700s. Basically, people would go off to war and they would say to somebody, “Look, watch over my horses for me. I entrust them to you.” You would hold them in trust for somebody else. This is essentially what the box is there for. You basically put everything inside of the trust and say, “Listen, hold onto this for me.”
With revocable trust, you’re the person holding onto your own box. It sounds a little bit silly, but because it’s just an organizational tool, what you did is say, “Look, I’m going to hold onto this stuff for myself, but I’m going to layer some instructions on here so that if I become sick or when I die the next people who have to manage this can do so efficiently.”
The reason why the trust is a better tool than relying on wills ‑‑ you usually compared between those two ‑‑ is because the will doesn’t apply to all of your assets. It won’t apply to your life insurance or your annuities, your 401(k), anything that you own jointly with anybody else simply won’t apply to that.
You would need two sets of instructions or multiple set of instructions. You’re going to have the will. That’s one set of instructions. Then you’ll have each of the beneficiary designations on each of the various accounts. You’ll have a set of instructions for the life insurance. That’s two. For the annuities, that’s three. For your 401(k), that’s four or five or six. Conceptually, that’s inefficient.
Essentially, what we did was create one place. One place where all the instructions are contained. Then we can have uniformity as to what we’re doing with our planning. Then there are all kinds of things that we can do with that, how we protect assets for your next generation so that your kids have divorce proof and creditor proof inheritance.
That gets a little to the next level of trust. Simply explained, trust is nothing more than a holding container. It’s a bucket. It’s a box. It’s there to hold your stuff. The more work that you do to organize your stuff now, the easier you’re going to leave your estate to be managed by either your spouse when you die, or your kids after both of you are gone.
That’s probably the best gift that you can give them. I can tell you. So many people come back to our office complaining about the mess that they’ve had to deal with. Their first question is, “How can I avoid this for my kids?” Then we talk to them about trusts.
That’s it. That’s Three Concepts Simply Explained. We hit Medicaid planning. We hit annuities. We hit trusts. Medicaid planning, we talked about using the rules, putting everything aside, more than five years, before you apply for benefits. Annuities, a trade with an insurance company in exchange for mortality credits and a lifetime income stream. Trust, a container or a box.
Let us know what you think about this, by the way. It’s a new concept for us. We’d like to do it once a month, but we need to hear back from you. If you like what it is, just drop us a line. Send an email to firstname.lastname@example.org and we’ll keep it going or not, based on what you say, [laughs] maybe that you hated it. That’s fine. You can let us know that, too.
We will be back next week. Thanks much for joining with us. If you like the show at all, what we can do is we can share that show with somebody else. You can either share it on Spotify because we’re on Spotify now or the iTunes. Leave a review.
Victor: Do what you can to spread the news, one of our favorite things to do. We hope that you like it also. We will back next Saturday. This has been Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure.
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