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Asset Protection Planning with Trusts

Posted by Andrew Byers | Feb 03, 2013 | 0 Comments

Certain types of trust may be used by seniors who want to protect their savings and other assets from creditors and long-term care costs.  These trusts are referred to as “income-only trusts” or “Medicaid Asset Protection Trusts.  The person who creates the trust is called the “settlor.”  These trusts may be drafted so that the settlor can receive the income and dividends generated by the assets in the trust.  Alternatively, if this income is not needed, it can be allowed to accumulate in the trust, where it is added to principal.  These trusts work well for seniors who do not usually need access to the principal of some of their savings.  Such trusts are an excellent legal tool that allow seniors to obtain financial assistance to help pay for long-term care while preserving some of the senior's assets.

If the settlor's other sources of income, such as Social Security or a pension, are sufficient to provide for the settlor's daily needs, then the income generated by the assets in the trust can be added to the growing principal and will never have to be used to pay the settlor's expenses.  Moreover, the assets in the trust typically remain intact for the settlor's lifetime, ensuring that the money will be there for emerge purposes while the settlor is living.

Both the income-only trust and Medicaid Asset Protection Trust are irrevocable trusts, which means the settlor gives up the ability to remove the trust principal themself.  It is that feature which protects the savings and assets in the trust from a Medicaid spend-down.  While these trusts are irrevocable, they are actually quite flexible in that the settlor retains the ability to change who the trustee of the trust is and who will inherit the trust assets when the settlor dies.  Also, the manner in which assets in the trust are invested can be changed.  For example, if a mutual fund is transferred to the trust, the mutual fund can later be sold and the proceeds invested in another mutual fund or the proceeds can be deposited in a bank account titled in the trust.  If the home is transferred to such a trust, the home can later be sold.  A new home could be purchased in the name of the trust or the proceeds received from the sale of the home can be saved in an account titled in the trust or be invested.

Upon the death of the settlor, the assets in the trust are distributed to beneficiaries of the settlor's choice (not the state or federal government) and without the need to be settled in probate court.

An important benefit of these trusts is they prevent the creditors of the future beneficiaries of the trust from garnishing or seizing the trust assets.  The future beneficiaries of the trust are often the settlor's children and/or grandchildren.  For example, if the settlor's middle-aged adult daughter is getting divorced, the soon to be ex son-in-law would not be able to attach the assets in these trusts.  As such, these trusts provide for multi-generational legacy planning and keep the settlor's assets in their family bloodline.  They provide a way for grandchildren to receive an inheritance from their grandparent that could be used to pay for a college education while providing a remembrance of the grandparent.

A Medicaid Asset Protection Trust is very useful to plan for one's home.  This is particularly important for single seniors who own a home, but later need to qualify for Medicaid to help pay for the $7,000.00 monthly nursing home cost.  While one can own a home and qualify for Medicaid, if the home is sold, the cash proceeds received would have to be spent down to $2,000.00 or otherwise protected in order to keep Medicaid eligibility.  If instead the home had been transferred to a trust at least 5 years before needing to apply for Medicaid, the home could later be sold without jeopardizing continued eligibility for Medicaid. 

About the Author

Andrew Byers

Andrew Byers' elder law practice focuses on the legal needs of older clients and their families, and works with a variety of legal tools and techniques to meet the goals and objectives of the older client. Under this holistic approach, I handle estate and longevity planning issues and counsel cli...

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