When trying to make critical decisions in estate planning, it’s essential to consult with knowledgeable attorneys. These discussions help you evaluate the necessary details to protect your assets in all situations. For example, how can you preserve your estate assets if you become disabled and require long-term care in a nursing facility? While documents such as powers of attorney can be essential to managing disability, an asset protection trust is often the solution to financing long-term care.
What Is an Asset Protection Trust?
Generally, a trust is nothing but a set of instructions that a grantor (you) gives to a trustee (your heirs, an attorney, or another trusted party) who agrees to carry out those instructions. A trust may be revocable or irrevocable:
- Revocable means the grantor can change or terminate the document at any time, including types of assets in the trust, the trustee, and so on.
- Irrevocable means the trust is its own entity and any property protected by it can’t be retrieved by the grantor. Once established, an irrevocable trust can’t be easily changed or terminated by the grantor or any other party.
An irrevocable asset protection trust can be a useful component of a comprehensive estate plan. As the grantor of this type of trust, you can’t amend any of its provisions, but your trustee has the power to change investments, buy and sell assets, and generally manage the assets as you would have done. So your choice of trustee is important.
The estate planning professionals at Skeeter, Bennett, Wilson & Humphrey offer this general description as a talking point you can consider for your unique circumstances. That said, some of our clients have found an irrevocable asset trust helpful for protecting assets from Medicaid estate recovery. Here’s how it could work.
If someone is in need of long-term care, assets transferred to an irrevocable trust aren’t counted as resources for Medicaid qualification or recovery purposes. However, in order to gain this protection, your assets must be held in the trust for at least five years.
According to the Internal Revenue Service, an irrevocable trust is typically a grantor trust. As such, trust income may be reported under the Social Security number of a grantor. This means a separate income tax return doesn’t need to be filed for the trust.
Another advantage of a grantor trust is that beneficiaries will get a stepped-up tax basis on assets inherited through the trust. Here’s what we mean:
- Assume you own a property 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. But when they sell the property at your death for its current value, they’re responsible for considerable capital gains tax on the difference between $200,000 and $50,000: $150,000.
- However, if 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 is the value at the time of the inheritance, or $200,000. Then, if they sell the property for $200,000 upon inheriting it, there’s 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.
An irrevocable trust for asset protection isn’t subject to probate upon your death. Instead, the trust contains instructions on how the trustee must distribute its assets upon your passing. This means the distribution of your trust assets isn’t held up in probate court and may instead be distributed to your beneficiaries quickly and efficiently.
What Type of Property Can Be in an Asset Protection Trust?
Most any type of property can be placed in the trust. This includes:
- Real estate
- Stocks and bonds
- Bank accounts, including checking, savings, money markets, and CDs
- Life insurance policies
One type of property not placed in a trust is an IRA. As an individual retirement account. Federal laws dictate it must be owned by an individual.
We’re happy to meet with you during a free consultation to discuss which estate planning pathway works best for you and your family.