The attorneys at Skeeters, Bennett, Wilson & Humphrey have, for decades, prepared estate planning documents that put our clients’ affairs in order and provide them peace of mind. In our estate planning consultations, we are frequently asked by clients how they can preserve their estate if they become disabled and require long term care in a facility. While documents such as powers of attorney can be essential to managing disability, an asset protection trust is often be the answer to the problem of financing long term care.
A trust, in general terms, is nothing but a set of instructions that a “Grantor” gives to a “Trustee” who agrees to carry out those instructions. A trust may be revocable or irrevocable. An irrevocable trust, if properly drafted, can be useful for protecting your assets from Medicaid estate recovery if you need long-term care in a nursing home.
What is Medicaid Protection?
Irrevocable trusts used in the long-term care planning context are sometimes called “Asset Protection Trusts,” meaning the assets transferred to such a trust are not counted as resources for Medicaid qualification or recovery purposes. It is necessary that the assets be in the trust for at least five (5) years to gain protection.
In order to gain protection from Medicaid, certain trade-offs are required. First, the trust must be “irrevocable,” meaning that the grantor gives up the power to revoke/cancel the trust. Second, the grantor cannot have the power to amend the trust. This means that the grantor cannot change any of the trust terms. Although the provisions of the trust cannot be changed, your trustee has the power to change investments, buy and sell assets, and, generally manage the assets as you would have done, so the selection of the trustee is a very important choice.
Some Other Advantages
A trust of this type has tax benefits in addition to offering protection from Medicaid. The trust is typically a “grantor trust” for income tax purposes. As such, trust income may be reported under the social security number of a grantor. Because income is reported on the grantor’s social security number, no separate income tax return needs to be filed for the trust.
Another advantage of a grantor trust is that beneficiaries will get a “step up” in tax basis on assets inherited through the trust. An example will illustrate the advantage- assume you own a property you purchased 20 years ago for $50,000. In your 20 years of ownership the value of the property has appreciated to $200,000. If you gift this property to your children to “get it out of your name” in case you go into a nursing home, your children’s tax basis in the property is the same as yours—$50,000. If they sell the property at your death for its current value, they will pay capital gains tax on the difference between $200,000 and $50,000—$150,000. If, instead, you place the property into a properly drafted asset protection trust, and your children inherit the property through the trust upon your death, their tax basis becomes the value at the time of the inheritance, or $200,000. If they sell the property for $200,000 upon inheriting it, there is no difference in their tax basis and the sale value, so they pay no capital gains tax. This is no small advantage of using a trust for your long-term care planning.
Another major benefit of an irrevocable trust for asset protection is that the trust is not subject to probate upon your death. Instead, the trust will contain instructions on how the trustee must distribute the trust assets upon your passing. This means the distribution of your trust assets will not be held up in probate court and may instead be distributed to your beneficiaries quickly and efficiently.
What type of property can be placed in the trust?
Most any type of property can be placed in the trust. Often the types of property held in trust are real estate, stocks, bank accounts (including savings, checking, money markets and CDs), farms, real estate, vehicles, collectibles, and life insurance. One type of property that is not placed in a trust is an IRA. IRAs must be owned by individuals under Federal law.
An irrevocable asset protection trust can be a very useful component of a comprehensive estate plan. As with any legal matter, do not rely only on this explanation when making decisions about your estate plan. This blog is meant to give a very general description of the irrevocable trusts for asset protection planning without regarding to your unique circumstances. Trusts are complex instruments that require the assistance of a skilled estate planning attorney.
We are happy to meet with you and discuss which estate planning pathway works best for you and your family. Our office offers free consultations. If you are concerned about protecting your assets if you require nursing home care, contact us today.