Continuing Care Puts Hundreds of Thousands of Dollars Into Probate
Continuing Care Communities make sense for people who want to live independently now and have additional levels of care available later if they need them. But there’s a very specific estate planning problem that arises when someone enters one of these communities, and if it isn’t addressed before the contract is signed, it can undo a huge part of an otherwise well-designed estate plan.
The problem is the large upfront buy-in amount and what happens to any refundable portion of that money after the resident dies.
Many Continuing Care Communities require a very substantial payment up front in addition to ongoing monthly fees. Some or all of that initial payment is refundable after the resident dies or moves out, and some communities also return money from the sale of the resident’s unit.
If those amounts aren’t properly coordinated with the resident’s revocable living trust, the refund goes to the resident’s estate instead of the trust, which forces hundreds of thousands of dollars into probate even though everything else in the estate successfully avoided probate.
That’s the frustrating part: someone does everything else correctly, properly coordinating a home, bank accounts, investments, and other assets with a revocable living trust so the family doesn’t have to deal with unnecessary court bureaucracy after death, and then one Continuing Care Community contract quietly puts a six-figure amount right back into probate because the refund language says the money goes to the resident’s estate.
Understand Exactly What You Are Paying
Before entering a Continuing Care Community, the first thing you need to understand is exactly what money is required up front and what money is required every month. That means more than just knowing the total dollar amount. You need to know how much of the initial payment is considered a deposit, how much is a nonrefundable fee, how much is eventually returned, and what conditions determine whether the refund is made.
You also need to understand whether the refund changes depending on how long the resident lives there, whether the money is returned only after the unit is resold, whether administrative charges or other deductions come out first, and whether the refund is triggered by death, moving out, or some other event.
The same scrutiny applies to monthly fees because some communities charge those fees in advance and owe a prorated refund if the resident dies or moves before the end of the period that has already been paid for. The point isn’t simply to know how much the community costs. The point is to understand every circumstance under which money comes back to the resident or the resident’s family, because every one of those future payments needs to be coordinated with the estate plan.
Make Sure the Refund Goes Back to the Trust
If the resident has a properly funded revocable living trust, then the contract should be reviewed to make sure that any refundable buy-in amount, deposit, proceeds from the sale of the unit, or other refund due after death is payable to the revocable living trust rather than to the resident’s estate.
That distinction looks small on paper, but it’s the difference between avoiding probate and opening an estate just to collect one large refund check.
If the Continuing Care Community issues the money to the estate of the deceased resident, then someone has to open probate, qualify as executor or administrator, obtain court authority, establish an estate account, deposit the funds, and then administer that money through probate before it is ultimately distributed.
If the same refund is properly payable to the revocable living trust, the successor trustee receives and administers it directly under the terms of the trust instead of dealing with that additional layer of court administration. This is especially important when the buy-in amount is extremely large because a $250,000 or $400,000 refund isn’t a minor asset that can simply be ignored. If the contract sends that money to the estate, then the entire purpose of having carefully funded the trust is undermined by a single contractual provision.
Monthly Fees Create the Same Problem
The same issue applies to monthly charges, and this is an area that is easy to overlook because the amounts seem small compared with the original buy-in. Some Continuing Care Communities require monthly fees to be paid in advance, so if a resident dies or moves out early in the month, there’s a prorated amount that should be returned for the unused portion of that month.
The contract should make clear where that prorated refund goes after death, and if the estate plan is built around a revocable living trust, then the agreement should direct that those refunded amounts be returned to the trust rather than to the estate or to the deceased resident individually.
The account originally used to pay the monthly fee shouldn’t determine where the refund goes. The contract should coordinate the refund with the estate plan regardless of the source of the original payment. If a resident paid a monthly charge from an individual checking account but the estate plan directs assets through a revocable living trust, the refund provision should still direct the money back to that trust. The goal is to make sure every dollar that should be returned to the trust actually goes back to the trust instead of creating a completely unnecessary probate problem.
Do Not Rely on What Someone Tells You
This is where I’ve seen clients run into serious problems. My clients have specifically discussed these issues with Continuing Care Communities before signing contracts and have been assured that deposits or prorated monthly charges would be returned to their trusts after death.
Then the resident dies, the family waits for the refund, and the check arrives payable either to the estate or to the deceased individual. The family contacts the Continuing Care Community and explains that they were specifically told the money would go to the trust, and suddenly the answer changes.
Now someone points to a “policy,” or to language buried in the contract stating that after death the refund is payable to the estate of the resident. The verbal assurance turns out to be worth very little compared with the written agreement, and the family is forced to open probate just to collect money that everyone believed had already been coordinated with the trust. That’s why these provisions have to be reviewed in the actual contract. It isn’t enough for someone in sales, admissions, or administration to say that the money will go back to the trust. If that’s what is supposed to happen, then the agreement should say so clearly.
The Contract Matters More Than the Sales Conversation
People entering a Continuing Care Community are making several major decisions at the same time. They are selling a home, downsizing, coordinating health care, deciding what furniture to keep, moving investments around, and trying to determine whether the community will meet their long-term needs.
In the middle of all of that, it’s easy for a refund provision buried several pages into a contract to look like a minor detail, particularly when someone representing the community has already assured the resident that everything will be handled correctly.
But this isn’t a minor detail. The language governing where refundable deposits, sale proceeds, and prorated monthly fees go after death determines whether the family has to open a probate estate despite having otherwise completed excellent trust planning.
That’s why the contract should be scrutinized before it’s signed. The resident should know exactly who receives the money after death, and if the plan is built around a revocable living trust, the agreement should be coordinated so those refunds go to the trust.
Do Not Let One Continuing Care Community Contract Undo an Entire Estate Plan
A properly funded revocable living trust does an excellent job of keeping assets out of probate, but estate planning doesn’t exist separately from the contracts people sign later in life. Every time someone enters into a major agreement that creates a future right to receive money, that agreement needs to be reviewed to make sure the future payment is coordinated with the estate plan.
Continuing Care Communities are a perfect example because the numbers are so large. Someone spends years carefully structuring an estate to avoid probate, only to have hundreds of thousands of dollars pulled right back into the court system because one contract says that a refund is payable to “the estate of the resident.”
That shouldn’t be treated as a technicality because it determines whether the estate plan works as intended or whether the family is forced into a probate process that should have been completely unnecessary. A properly funded trust shouldn’t be undermined at the end of the process by a Continuing Care Community refund that was never coordinated with the trust in the first place. The time to solve that problem is before the contract is signed, when the language governing deposits, refunds, unit-sale proceeds, and prorated monthly charges can be reviewed and addressed.
For more information on avoiding probate and proper trust funding, check out the information at www.FreeTrustCourse.com