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Protecting Your Assets:
Asset Protection Trust Strategy

Marks Elder Law Michael H. Marks, Esq.

Michael H. Marks

Linda Law Carroll

412-421-8944

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This strategy can be relevant for both single AND married persons, seeking either VA benefits OR Medicaid nursing care benefits only. Please refer to the separate texts for the applicable basic VA and Medicaid rules.

You can use an Asset Protection Trust to protect assets while receiving either Medicaid-paid nursing care or VA “Aid and Attendance” benefits to pay for expensive long-term care. This strategy involves creating a trust now and putting part of your money into the trust so that you no longer own these assets directly and individually,

In addition, the ordinary estate planning benefits of the trust can help you accomplish important family estate planning goals such as safeguarding the inheritance for your chosen beneficiaries and avoiding probate.

Asset Protection Trust

The “Asset Protection Trust” is created to hold some of your assets to reduce your personal, individual net worth. A trust is generally a three-way transaction:

  • The creator of the trust, sometimes also called a “Settlor” or “Grantor” brings the trust into existence by signing an Agreement of Trust, and changes assets and accounts so they are owned by a Trustee, not by an individual as before.
  • The Trustee is legally authorized and also has a legal responsibility and duty to carry out the instructions contained in the Agreement of Trust. There can be more than one Trustee or Co-Trustees. For these purposes, you should generally not be the Trustee of your own trust.
  • The Beneficiary or beneficiaries of the trust are entitled to receive, use or enjoy the property or proceeds of the trust, but only to the extent that the trust agreement provides.

Note: You can’t put IRAs or qualified retirement plan accounts directly into the trust. You need to liquidate them first, and that can create a significant tax liability.

Irrevocable Trust

Trusts are either revocable or irrevocable. If a trust is revocable, then you can undo the trust and take the money back so the trust funds still belong to you individually. In an irrevocable trust the trust funds are no longer deemed to be available to you individually. An Asset Protection Trust is an irrevocable trust.

No Access to Trust Proceeds

In an Asset Protection Trust, you voluntarily give up your right to direct access or receive distributions from the trust. (Sometimes you can give up your right to access the principal but retain all rights to the income to live on and to pay for care during the following years as needed.)

However, even though trust proceeds can’t be distributed to you or used to benefit you directly, you can actually still obtain trust proceeds when needed by making withdrawals through a named beneficiary such as your child or other trusted person.

Asset Protection Trust for VA Eligibility – Amount and Timing

When seeking VA benefits, you would keep only the permissible amount of assets (“net worth”) in your own hands individually and out of the trust, and would put the rest of your money into the trust to reduce your individual net worth to a low enough level to qualify (though the determination of net worth can be subjective and unpredictable). In the past, a very general rule required less than $80,000 in assets, not counting your home, car and prepaid funeral.

For now, VA benefits eligibility rules do not include the kinds of prohibitions against gifting and “look back period” as under Medicaid rules.

Asset Protection Trust for Medicaid Eligibility – Amount and Timing

When seeking Medicaid eligibility, you would keep enough assets in your own hands individually and out of the Trust, to pay for nursing home or other care if needed for some part of up to the next five years. Remaining assets are put into the trust.

Medicaid “looks back” five years to see if you made any gifts. Such gifts cause a penalty period of ineligibility that delays when Medicaid will begin to pay for you. When you put money into the trust and give up access to its value, Medicaid sees it as a gift to the ultimate beneficiaries and imposes a penalty period of ineligibility if you apply during the initial five year period after the Trust is created. The penalty period is determined by dividing the amount of assets in the Trust by the monthly cost of nursing home care. Depending on the amount of assets placed in the Trust, the penalty period can be months or years before ending.

Therefore, this strategy should be implemented as soon as possible to start the clock running on the five year look-back period. You shouldn’t wait until you need nursing level care to begin this effort.

After five years have gone by, you can then apply for Medicaid if needed and the principal value placed into the trust would be safe for you and your family. It won’t be an available resource that you have to spend because the trust says that you can no longer access the trust value directly, and will be safe and protected instead..

Changing Course if Needed

Sometimes it’s necessary to change strategies. For example, if you use an Asset Protection Trust initially to get VA benefits but thereafter need to apply for Medicaid benefits instead (usually if you enter a nursing home), you may need to change strategies and undo the trust, because of the differences between VA and Medicaid eligibility rules.

In either scenario, if you need nursing level care and Medicaid sooner instead of later, you could act to withdraw the trust and turn to other strategies that become available once you have become “nursing facility clinically eligible,” such as the “Gift and Annuity” strategy.

If you initiate an Asset Protection Trust strategy but don’t ever need to apply for Medicaid within the five years thereafter, no harm is done. All it will cost you is the cost of having implemented the plan to try to protect those assets, and when you die the trust assets will go to your designated beneficiaries while avoiding probate and with the protection of trust arrangements.

When is it a “Good Fit”?

This strategy is an especially good fit for you any time it’s not as likely that you will need Medicaid within the next five year - for example, if you are in relatively good health now, or if you have long-term care insurance to help pay for needed care during the next five years, or if you have assistance from family to help you stay at home as long as possible.

This strategy can be more costly to implement and not as good a fit when you have to use IRA or other qualified retirement plan money to fund the trust. You can’t put IRAs or qualified retirement plan accounts directly into the trust so you need to liquidate them first, and that can create a significant tax liability.

Call today to meet with an elder law attorney in Pittsburgh, with offices in Monroeville. Contact Marks Elder Law today to start the planning process.

We will gladly review your planning for long term care to ensure it is up-to-date.