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When is Trust Planning Appropriate?

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Clients who are nearing retirement age are bombarded with information about asset protection planning from many sources. Their insurance salesman says one thing. A neighbor warns about the cost of nursing home care and tells a horror story about a family member who lost everything. Friends at the beauty salon share what they’ve done to protect themselves and family in case they need nursing home care in the future.  With all of this information overload, it’s a wonder clients in this age range can think clearly about long-term care planning issues at all.

For individuals worried about long-term care costs destroying their financial legacy, meeting with an elder law attorney is time well spent. Elder law attorneys can provide important advice and clear up the misconceptions and half-truths that are often packaged in barber shop talk.

Although each case is different, one strategy elder law attorneys frequently propose involves trust planning to protect assets from nursing home costs. Below, I outline some common scenarios where trust planning may be appropriate.

You Want to Leave a Legacy

In most instances, the primary purpose of asset protection trust planning is to leave a legacy to children or other family members. The staggering cost of nursing home care causes parents to worry that their assets will be depleted, leaving nothing left to pass on. Asset protection trust planning provides a solution for this by allowing parents to transfer assets out of their name using a safe arrangement.

Assets transferred to an appropriately drafted asset protection trust more than five years prior to filing a Medicaid application do not need to be disclosed. This makes it easier to qualify for Medicaid and shelters the assets transferred to the trust.

Another reason asset protection trusts allow families to leave a legacy is that under current law real estate transferred to a specially structured trust should not be subject to the Medicaid Estate Recovery program. Because of this, asset protection trust planning is a good strategy for families whose home is their most valuable asset.

You Are Considering Giving Your Home to the Children

If you are considering transferring your home to your children, or “selling” your home to them for a dollar, you should consider trust planning instead.

Outright transfers of assets are risky. Often, clients engage in these types of transfers without knowing all of the potential risks and consequences. There is a five year look-back period on the transfers of assets for less than fair market value when an individual applies for Medicaid to help pay for long-term care expenses. Transferring the home to your children may also expose it to your children’s life circumstances – their divorce, personal injury claims, or drug, alcohol, and gambling addiction can all create situations where you are no longer secure in your home. Once you transfer property to another person outright, they own it and can do what they want with it.

Transferring your home to an asset protection trust is safer because it will not be subject to the life circumstances of your children and you can retain the right to live at the property for the rest of your life.

You Are Comfortable Relinquishing Some Control of Assets

Trusts are legal arrangements where a settlor (trust creator) transfers assets to a trustee to manage for the benefit of the trust’s beneficiaries.

Settlors of asset protection trusts generally retain certain powers, such as the power to change the distribution scheme to beneficiaries, remove the trustee(s), and to direct that the trustee(s) make gifts to the beneficiaries during the life of the settlors.

In order for the trust to protect assets, however, settlors must give up some power as well. The settlors will not have unfettered access to the trust assets and what is transferred in cannot be distributed directly back to them. The trust must be irrevocable so that the settlors cannot receive the assets directly by revoking or “undoing” the trust. Finally, settlors must entrust the day-to-day management of the trust assets to the trustee(s).

Prospective trust settlors must understand that in order to gain protection, they may need to give up some control. For clients who do not mind this arrangement, the power to shelter assets from the cost of long-term care is awesome.

You Did Not Purchase Long-term Care Insurance

Nursing homes are usually paid one of three ways – privately from the resident’s savings, by long-term care insurance, or through government benefits.

Long-term care insurance and asset protection trust planning are both strategies for early planners. Like any insurance product, there is a screening process for long-term care insurance applicants. The poorer your health and older you are, the less likely you are going to be to get an affordable policy. This, coupled with the phenomena of increasing premiums has traditionally made long-term care insurance a difficult product for agents to sell.

While long-term care insurance makes sense in some circumstances, for many clients asset protection trust planning is a better alternative. Clients who, because of their health, could not qualify for an affordable insurance policy can engage in trust planning. It is also good for clients who did not, or do not wish to pursue long-term care insurance but do want to plan to leave a legacy.

Conclusion

If these common scenarios sound like things you have been considering, you should schedule an appointment with an elder law attorney to discuss your options. Trust planning is not the only tool that can be used to protect assets from the cost of long-term care; however, it can offer tremendous power and flexibility for many families.

If you reside in northeastern or central Pennsylvania, an attorney at Marshall, Parker & Weber would be happy to meet with you to discuss your options and help you determine if trust planning is appropriate for you.