What you need to know to protect your family from ever increasing long-term care costs.
In the world of retirement planning, consumers can use many different devices to protect their assets, accumulate wealth, and allow their assets to pass to their family, or other beneficiaries, without having to go through probate. In our practice, another common goal among our clients is to create a plan that will allow them to receive the care that they need without having to spend every last hard-earned dollar on a nursing home, so that they can pass some assets on to their children or heirs.
Not knowing how to properly plan, some clients decide to put all their money into their child’s name in an attempt to protect it from a nursing home. The problem with transferring assets is that you have given them away. You no longer control them. If your child is sued, has a creditor, goes through a bankruptcy or divorce, your assets are at risk. A safer approach is to put them in an Irrevocable Trust.
A trust, in general, is a legal entity under which one person, the “trustee,” holds legal title to the property within the trust for the benefit of the “beneficiaries.” The trustee must follow the terms set out in the trust instrument. When planning for a nursing home, we have to consider whether the trust assets are counted as part of the Medicaid resource limits. This will all depend on the terms of the trust.
A “Revocable” Trust is a trust that can be changed or revoked by the person who created it. Because the person who creates this trust is entitled to the income and principal of the trust, Medicaid considers assets owned by this kind of trust to be countable in determining Medicaid eligibility. Thus, although Revocable Trusts are a good way to avoid probate and transfer assets, they are of little use in Medicaid planning.
An “Irrevocable” Trust is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income and principal cannot be applied to benefit you or your spouse. Assets transferred to an Irrevocable Trust are no longer owned by you as they become the property of the trust, which also keeps your assets safe from most creditors. Since you no longer have a financial interest in the assets in the Irrevocable Trust, they cannot be taken as part of divorce or other proceedings introduced by creditors, thus offering the desired asset protection. Like the Revocable Trust, upon your death, or the death of the surviving spouse, the principal is paid to the beneficiaries.
Because you do not have access to the principal of this trust, the principal in an Irrevocable Trust cannot be counted for Medicaid or VA purposes, which provides the nursing home protection that most clients are looking for.
As you can see, making the decision to do an Irrevocable Trust should not be taken lightly. The only way this type of planning works is if you have at trusted child or friend to be trustee of the trust agreement. They will have complete access to all the funds within the trust agreement while you will continue to maintain direct control over your working checking account, savings account, and income. The trustee may, at their discretion, take a distribution from the trust and return assets to you if needed. However, there is no legal requirement that they do so. Therefore, having a trusted person in this position is imperative.
When Should You Think About An Irrevocable Trust?
Determining when to move assets into an Irrevocable Trust depends on your specific family situation. Irrevocable Trusts are usually established by older adults who wish to protect their assets from nursing home expenses or qualify for Veterans benefits. The Irrevocable Trust works particularly well for those older adults that are not pulling from their existing retirement and savings accounts. These assets that are just sitting there gaining interest get moved into the Irrevocable Trust, while leaving the day to day bank accounts unchanged.
In order to gain nursing home protection, the assets must be moved 5 years prior to applying for Medicaid. By placing assets into an Irrevocable Trust five years ahead of the actual need for nursing home care, the older adult protects his or her assets from nursing home costs and preserves the assets for the benefit of named beneficiaries, all while still remaining eligible for Medicaid benefits. However, in the event nursing home care is needed within 5 years of transferring assets to the Irrevocable Trust, the trust document will also spell out specific instructions for releasing funds and assets to the beneficiary to preserve the older adult’s Medicaid eligibility.
If the older adult is a Veteran or a widow(er) of a Veteran, there is no look-back period for the Veterans Aid & Attendance benefit, at this time. This provides more flexibility for a Veteran or a widow(er) of a Veteran, allowing him or her to establish an Irrevocable Trust and start receiving the VA benefit when the need arises.
Additional Benefits of an Irrevocable Trust
Irrevocable Trusts also have the benefit of passing assets to your beneficiaries without going through probate. Since the assets transferred to the Irrevocable Trust are already technically the beneficiary’s property, they do not need to go through probate court after your death. This means that your beneficiaries might have access to the assets much sooner than if the assets had simply been willed to your heirs.
Irrevocable Trusts can also have provisions for special purpose estate planning for your beneficiaries, such as Special Needs Trusts or Discretionary Trusts for children with special needs.
As with all estate planning, the laws can change so a consultation with an expert is advised before deciding if an Irrevocable Trust is appropriate for your situation. The attorneys at SSR Law Office can help you evaluate your estate plan and ensure that you have appropriately planned for your long-term care needs. Contact SSR Law Office today for a free initial consultation.