Asset Protection Trusts
Is an Asset Protection Trust Right for You?
One of the things you can do with a trust in your estate planning is to protect your assets and keep them available for your family. Specifically, many people put assets in an irrevocable trust to make sure they do not have to spend down their legacy if they have to go into a nursing home.
This may or may not be the right choice for you and your family, but it is a powerful estate planning tool. You can also review the answers to frequently asked questions about planning for long term care.
Revocable Trust vs. Irrevocable Trust
There are many different types of trusts you might use in your planning. A "revocable" trust means you can change your mind and alter or eliminate the trust in the future. Revocable trusts can accomplish many goals, but asset protection is not one of them.
An irrevocable trust is one you cannot alter or eliminate after you create it. The primary benefit of this kind of trust is that it can protect your assets from creditors. If you want to protect your assets from the costs of assisted living, you will have to create an irrevocable trust.
Ways to Fund Long Term Care
There are three ways most people pay for assisted living or long term care.
If you have long term care insurance, you can use that. It has become harder to get long term care insurance, particularly if you are already old enough to be thinking about care.
Some people also "self-fund" their long term care out of their own assets. This can be a financially risky decision if you may be in assisted living for a long period of time.
Finally, Medicaid will pay for nursing home costs if you qualify financially. In Massachusetts, Medicaid is administered through MassHealth. MassHealth will only approve you if your assets fall below a certain threshold.
How a Medicaid Irrevocable Trust Works
Assets placed into a trust are legally owned by the trustee. The trust document will dictate how those assets are used and distributed. To fully protect your assets, the trustee cannot have the ability to distribute those assets to you. If they have that ability, MassHealth will consider the assets available to you and will not qualify you for benefits.
You can, however, allow the trustee to distribute income generated from the assets to you. For example, if you put a rental property into trust you can receive rental income from that property. Or if you put an investment portfolio into trust, you can receive dividend income. What you can't receive is the assets themselves.
When to Consider an Asset Protection Trust
If your goal is to protect your assets from the cost of long term care, you should know that Medicaid and MassHealth have a five year "look back." This means that any assets you put into trust less than five years before you apply for Medicaid will be considered still available to you.
Starting this process too late could mean you lose the opportunity to shelter your assets.
Starting this process too early has its downsides as well. Remember that if you place assets into e Medicaid trust, you cannot change your mind. For this reason most people do not consider this type of trust while they are younger and still have significant financial responsibilities.
Depending on your health, you might start considering this kind of trust when you are in your sixties or early seventies.
What Assets to Place in Trust
Because this trust is irrevocable, you want to think carefully about which assets to shelter. Even if your children are grown, you have finished paying for college, and your mortgage is paid off, you might still have need for liquid assets in the coming years.
If you have real property and cash or investments, you might consider putting the real property in trust and retaining access to the more liquid assets. This is especially true if you have income-generating real estate, because you can still access the income from those assets.
Another reason to retain some assets outside of the trust is to ensure you have choices if and when you or your spouse need long term care. Not all facilities will accept Medicaid patients, but if you change from self-pay to Medicaid or MassHealth after you move into a facility, they have to keep you.
For this reason many families leave enough money liquid that they can "self-pay" for some number of months. This gives you and your family a much wider choice of facilities so you can select the one that best meets your needs.
Giving Away Assets
Another strategy for protecting assets is to use a gifting strategy. Under federal tax law, you can give up to $15,000 per person away each year without paying gift tax. If you have two married children and four grandchildren, you could give away $120,000 a year tax free by making a gift to each of your children, their spouses, and their children. You can do this with cash, by transferring stocks or bonds, or by giving away factional interests in a business or real estate.
This is a great strategy not only for asset protection but also for minimizing estate tax liability. What you need to remember, though, is that the MassHealth five year look back still applies. So if you make these gifts less than five years before applying for benefits, all those amounts will still be considered available to you. Just like planning an irrevocable trust, it is important to consider the timing of these gifts.
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