Asset Protection Trusts
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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 assisted living. This tool can also be used to protect assets from future creditors of the trust beneficiaries.
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. Why an Irrevocable Trust is Critical to Asset ProtectionThere 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 reason it is so important for asset protection is simple: the law will not consider that you have truly given assets away if you retain the power to take them back. Asset Protection Trust: How It WorksAssets 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 the core assets to you. If they have that ability, the law will consider those assets available to you.
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. Those will distribute to your beneficiaries upon your death following whatever instructions you have included in the trust. |
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Asset Protection Trusts: When Should You Consider One
If your goal is to protect your assets from the cost of assisted living or 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 a 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.
If your goal is to protect assets from creditors, either yours or your beneficiaries, the timing is something you should discuss with your estate planning attorney. You can create an irrevocable trust that protects the assets from your beneficiaries' future creditors or even spouses at any time during your planning. If your goal is to protect assets from your own creditors, you need to be sure that the transfer would not be considered fraudulent under state law. Specifically, if you already have a judgment against you or a significant debt you are concerned about, you should get legal advice to make sure the transfer to the trust will be considered valid.
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 a 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.
If your goal is to protect assets from creditors, either yours or your beneficiaries, the timing is something you should discuss with your estate planning attorney. You can create an irrevocable trust that protects the assets from your beneficiaries' future creditors or even spouses at any time during your planning. If your goal is to protect assets from your own creditors, you need to be sure that the transfer would not be considered fraudulent under state law. Specifically, if you already have a judgment against you or a significant debt you are concerned about, you should get legal advice to make sure the transfer to the trust will be considered valid.
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.
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.
Asset Protection Strategy Without a Trust: 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.
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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Jenna Ordway
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