Blog: Preserving wealth with an irrevocable wealth replacement trust (6/27/22)


Long-term care (LTC) insurance has seen hard times since the 1980s. This article explains the LTC insurance decline and describes a life insurance alternative that may interest some married couples.

Decreasing long-term care insurance availability

Factors driving companies away from LTC insurance in recent decades include increasing life expectancy (from 74 years to 79 years between 1980 and 2019), increasing obesity (from 30.5% to 41.9% between 1999 and 2000) and rising LTC costs (more than 60% since 2004).


Wealth replacement strategy

A wealth replacement trust strategy can be a powerful alternative to LTC insurance. The idea is to replace wealth consumed by LTC costs with life insurance benefits.

Term life and whole life insurance policies

There are two basic life insurance types: a term policy without a cash surrender value (CSV) and a whole life policy with a CSV. A whole life policy owner can surrender the policy in exchange for the CSV before the insured person dies.

Joint and survivor life insurance policies

Most older insurance buyers must pay high premiums and pre-existing health conditions a disqualify them for coverage. However, some can buy affordable life insurance based on both spouses’ lives (called a “joint and survivor” or “second-to-die” policy), which only pays a death benefit when the surviving spouse dies.

Whole life insurance vulnerability to long-term care costs

LTC costs threaten a whole life policy because Medicaid treats the policy’s CSV like money in the owner’s checking account. So, many nursing home residents must spend their CSVs on LTC costs because they can’t have wealth above Medicaid’s $2,000 resource limit.

Medicaid transfer penalty

Medicaid has a “transfer penalty” to discourage applicants from giving away their assets to qualify for benefits. A transfer triggers a penalty unless it’s older than five years or the transferor receives nearly equal value for the transfer. Each uncompensated transfer dollar requires the applicant to pay about a dollar of LTC costs.

Unfortunately, the penalty doesn’t begin until resources fall below the $2000 limit, and the transferor needs nursing home-level care.

Preserving wealth with an irrevocable wealth replacement trust

Medicaid doesn’t include an irrevocable trust’s life insurance CSV as part of a married applicant’s resources if neither spouse can withdraw the CSV during their lives. So, a savvy elder law attorney can help some couples protect CSVs with irrevocable wealth replacement trusts.

More information

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About the Authors

Jeff R. Hawkins and Jennifer J. Hawkins have practiced in the areas of trusts, estates, and elder law for over 26 years. Both lawyers are Trust Estate Specialty Board Certified Indiana Trust Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators and he was the 2014-15 President of the Indiana State Bar Association. Find more information about these and other topics at © Copyright 2018 Hawkins Law PC. All rights reserved.

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