Is an Asset Protection Trust Right for Me?

The average price of nursing home care is approaching $80,000 a year, according to the 2009 MetLife Market Survey of Nursing Home, Assisted Living and Home Care Costs. For those for whom long term care insurance is not an option, what protection is there from financial catastrophe? This is the question that presents itself almost daily in my practice. There are some very powerful tools in the attorney’s toolbox, one of which is the subject of this column: asset protection trusts. Everyone knows what a Will is. But Trusts remain a mystery to the average consumer. Here is the definition: A trust is a legal arrangement through which one person (or an institution, such as a bank), called a trustee,” holds legal title to property for another person, called a “beneficiary.” In my practice I find that Trusts can be very valuable to different types of clients, regardless of wealth. Trusts can be used to save estate taxes and avoid probate, the traditional uses of trusts, but what most people don’t realize is that they can protect assets from having to be liquidated to pay the costs of long term care or to pay back Medicaid for care received. We often set up trusts for clients who have homes or farms they wish to protect in order to pass them on to their children. The parents must give these assets to the trust. Those assets are then no longer available to them, and for purposes of Medicaid or Veterans Benefits are not subject to countable asset calculations, or estate recovery. The trust exists for the parents’ lifetimes and after their death the trust property is distributed as the parents have directed in the trust document. During the parents’ lifetimes, assets in the trust are not subject to the claims of the parent’s creditors, nor the claims of children’s creditors (including divorcing spouses) as they would be if they had been given to the child the same tax advantages that it would receive if the parent still owned it. For example, if the property is sold out of the trust, before or after the parent’s death, the sales proceeds may be excluded from capital gains taxes. And the assets in the trust may provide a backstop to other assets and income retained by the parent if they are needed later on. Using asset protection trusts is an extremely complicated business. These types of trusts are typically used in addition to a traditional estate planning documents Wills and Powers of Attorney. Any attorney can draw a will, but these trusts must be set up by an attorney with knowledge of federal tax laws, Medicaid and Veterans Benefits eligibility rules, and a sensitivity to family dynamics. Selection of the Trustee is of paramount importance, both to protect the parent and obtain tax and creditor protection benefits. If you don’t have someone you trust one hundred per cent, these trusts may not be an option. They must be set up well in advance of a health crisis. There are other drawbacks as well. The parent has to give up all legal rights to the trust property. The trust becomes a separate taxpayer which requires additional tax reporting. However, in the right set of circumstances, these trusts can protect a family’s lifetime savings from being wiped out by a medical crisis.

Carole Spainhour, JD, MBA
Estate Planning and Elder Law, Love, Thornton, Arnold & Thomason
PA, Greenville SC 29603
Licensed in NC and SC
Named to Best Lawyers in America 2010 in the field of Elder Law