When your spouse has a chronic illness, your priority is to make certain your loved one gets quality care, day to day. But you also must plan for the future, taking into account the chance that you, the caregiver, may die before your spouse. So, it’s vitally important to review your financial situation and set up sound legal structures to protect and provide for your ill mate.

“That means establishing a system so that whatever the family’s resources are, they are properly invested and managed to provide ongoing support for the surviving spouse,” says elder-law attorney Peter J. Strauss, a partner in the New York City law firm of Epstein Becker & Green, and co-author with Nancy M. Lederman of The Complete Retirement Survival Guide (Facts on File, 2005). “In planning for the ongoing management of the patient spouse’s affairs,” adds Strauss, “you want to create a workable plan and address the issue of paying for the ongoing care without dissipating your estate.”

Think of your finances as two pots of money, recommends Strauss. “One belongs to the caregiver, who may die first. That money should be earmarked for the patient—the surviving spouse—to be managed via a trust established during the caregiver’s life or by his or her will. The second pot is the assets of the patient. These monies also must be managed either in a trust or via a durable power of attorney. If this is not done, it will be necessary to have a court appoint a guardian, which is often cumbersome.

Who Will Be in Charge?
A critical issue is deciding who’ll be the trustee and agent under the power of attorney, with authority to manage the ill spouse’s finances. “Make sure your financial plan is in order,” says Strauss, “so that the next caregiver has legal control over the finances or works well with the person who does.” And don’t forget to name successors; if the trustee or power-of-attorney agent you’ve chosen dies or becomes incapacitated, there is no plan!

You also want to name someone who will have the right to make medical decisions for your spouse should you die first. Many people consider designating their children first, notes Strauss, but it’s not always the way to go. “Are they appropriate choices?” he asks. “Do you, your spouse and the kids have a good relationship? Do they have the ability and judgment to do the task? Are they trustworthy? Are they willing? Will they be accessible when needed?”

If you don’t have a child, or if your child isn’t an appropriate choice, consider grandchildren or siblings—either yours or your spouse’s. “But if you don’t have a family member,” Strauss points out, “look at a professional advisor or a professional fiduciary, such as a bank trust department.” In doing so, check if the bank has experience with the aged and disabled, with supplemental-needs trusts and possibly even has social workers on staff or associated with them. Costs frequently are on a sliding scale based on the trust’s size, often with a minimum amount specified.

Touch All Bases
Since your goal is to have all your assets efficiently managed in trust for your surviving spouse, you don’t want assets passing to the surviving spouse automatically. Your will takes care of assets in your individual name, but not property owned jointly with your spouse or assets which pass to him or her as designated beneficiary under a life insurance policy or retirement plan. So, consider transferring title of joint assets to your name alone. Similarly, consider changing the beneficiary designations on life insurance and other “non-probate” assets so they don’t pass outright to your spouse and can be captured and managed through the trust.

Also consider government benefits. Strauss offers this case study: Bob and his Alzheirmer’s-afflicted wife, Sally, are both 70. In his name alone, Bob has $300,000 in a brokerage account and $100,000 in bank accounts. He also has a second brokerage account in both his and Sally’s name, a house and a summer cottage they jointly own, plus a $500,000 life insurance policy that names her as beneficiary.

“Let’s say Bob makes a will that states, ‘I give my entire estate to my trustees to hold in trust for the benefit of my wife, Sally,’” suggests Strauss. “If the joint brokerage account is left alone, it will pass to Sally and defeat the plan; she becomes owner by right of survivorship. If he also leaves the two real-estate properties jointly titled, those properties are going to vest in Sally as soon as Bob dies; by right of survivorship, she becomes the owner.”

Such an arrangement might leave Sally vulnerable. “She’ll inherit the property,” notes Strauss, “but she may lose her eligibility for Medicaid. Or a guardian might have to be appointed to manage the property. You don’t want to do that because it is court-controlled, cumbersome, expensive, and can leave in charge someone you might not have chosen. Instead, change the beneficiary designation to read, ‘If my wife, Sally, survives me, the beneficiary shall be the trustee named under my will for the benefit of Sally.’” The trustee or board of trustees has sole discretion to use the income and principle of the trust for Sally’s benefit. As for real estate, joint-titled property should be moved to the caregiver’s name, but first check with your financial advisor as to the estate-tax impact of such a move.

Some Cautions
“Be careful,” cautions Strauss. “Putting all assets in the caregiver’s name could have some adverse income- and estate-tax consequences, which need to be considered and balanced against the caregiver’s efficient-management goals.” If estate-tax planning is the primary goal, appropriate planning might mean splitting the couple’s assets between husband and wife—such as moving joint-titled property to tenant-in-common title—to capture two estate-tax “exemptions,” which in 2006 is $2 million for individuals. Putting all assets in one spouse’s name might result in more estate tax because of the loss of one of these exemptions. And there may be income-tax consequences if lump-sum distributions rather than periodic payouts of retirement funds are elected. “You must,” insists Strauss, “discuss this with your tax advisor.”

Right of Election
Strauss also points out that an attorney should be consulted about how to deal with what’s called a “spousal right of election.” In most states, a surviving spouse has a right to elect to take a share of the deceased spouse’s estate, even though a trust has been established for his or her benefit.

“Estate planners for a chronically ill spouse might feel it’s better to leave a hundred percent of the estate in the protective system, called a trust for the surviving spouse,” says Strauss, “but the surviving spouse could elect against the will and take an outright share. Still, tying in all the assets is probably the best way to provide for the support and care of a sick husband or wife over the long term.”