The different types of asset protection trusts which can be established for the elderly population can be confusing and overwhelming — not only for clients but even for elder law attorneys themselves. Particularly if you are a new elder law attorney, knowing which trust is right for your client can seem daunting.
But with some knowledge and information about these different types of trusts, you can glean the insight you need to properly advise your clients. In this article we’ll take a look at four types of trusts — Medicaid Asset Protection Trusts, Medicaid Family Protection Trusts, Veterans Asset Protection Trusts, and Parental Protection Trusts — and when to use them.
Medicaid Asset Protection Trusts
A Medicaid Asset Protection Trust is generally established when there is no immediate healthcare crisis. It can be used even when Medicaid is not being contemplated as an option. In this case, you’d want to talk with your client about future scenarios and the possibility of running out of money should they encounter a serious health problem. If applying for Medicaid is imminent for your client, this trust may be used to protect some, but not all, of their assets.
The Medicaid Asset Protection Trust will allow a person to protect all of their assets if they plan in advance, by putting them into this type of irrevocable trust while they are healthy and of sound mind. It provides your client with options when it comes to what portion of their assets they can use to pay for their care and whether or not the people they’ve allowed to have access to the trust will step in and help.
“One of the things that I like about this trust is that it doesn’t force anybody into Medicaid, but it gives them a choice later,” says Valerie Peterson, CEO, ElderCounsel. “It gives people choices, it protects assets, and if somebody does need to qualify for Medicaid in the future, it won’t — the assets in the trust won’t count against them.”
Overall the Medicaid Asset Protection Trust is an option which should be considered for any client nearing retirement or who has passed retirement age, or any client who contemplates the need for Medicaid years down the line. You can frame the client conversation by talking about possible future scenarios and giving them some statistics on long-term care costs. It’s also worth mentioning that if the Medicaid agency in your client’s state can recover compensation from the Medicaid recipient’s estate, the trust assets would be protected.
Medicaid Family Protection Trust
The Medicaid Family Protection Trust includes some of the same benefits as the Medicaid Asset Protection Trust but also offers some more significant asset protection. This type of trust protects not only the assets of the grantor, but also beneficiaries of the estate, which are usually the children of the grantor. This trust shields clients and their children from creditors or anyone else that may attempt to obtain assets in various scenarios (ex-spouses or spendthrift family members, for example) because the beneficiary’s inheritance is further held in trust.
The Medicaid Family Protection Trust is a good option for younger retirees who want to protect themselves and their children in the event of a divorce or other unexpected life scenarios such as an auto accident. This type of trust can be set up to include trust for lifetime beneficiaries so that the asset protection features continue even beyond the grantor’s death. In fact, it can continue in trust for future beneficiaries as long as state rules against perpetuities are not violated.
“If I were to think about the ideal client for a Medicaid Family Protection Trust, it’s someone who’s maybe a little more sophisticated, someone who doesn’t mind the idea of ongoing trusts for a long time, even after death, or you’ve got beneficiaries and children who are also a little bit more sophisticated and really get the idea and the planning concepts,” says Brian Albee, Director of Law and Technology, ElderCounsel.
It’s important to note that the Medicaid Family Protection Trust does require the appointment of a distribution trustee, which can scare some clients off. But Albee said this isn’t as complicated as it sounds. The trustee doesn’t need to be a bank or independent institution. It can be anyone who isn’t a family member and the person can be chosen by your client.
Many elder law attorneys find this trust to be a good way to talk to clients who may not want to talk about long-term care or Medicaid. Those who are willing to talk about their family and the fact that they want to ensure that any inheritance they leave isn’t taken by an unintended family member or creditor.
“It just gives attorneys another reason to talk to clients about something that’s a hot button issue for them, but it also provides the same protection and benefits as the Medicaid Asset Protection Trust,” Peterson says. “So, it gives them choices.”
Veterans Asset Protection Trust
The Veterans Asset Protection Trust is a intentionally defective grantor trust and should be considered when dealing with a client who is a wartime veteran or the surviving spouse of a wartime veteran who is interested in long-term planning. This trust is designed to meet the requirements from the VA of a complete gift or complete relinquishment. However, at the death of the grantor, the trust assets will still be eligible for a step-up in basis for income tax purposes.
The Veterans Asset Protection Trust can also be a good option for clients whose primary goal is Medicaid Asset Protection. This is particularly useful in states that have issues regarding grantor trust status including Massachusetts and New Jersey. While the name may not suggest it, the Veterans Asset Protection Trust can also be used in the Medicaid environment.
Overall, this is viewed as a more conservative trust. It provides all of the benefits of the Medicaid Asset Protection Trust, including the same tax benefits, but income generated is passed off to the lifetime beneficiaries of the trust instead of flowing through to the grantor in his or her individual income tax return.
“I can't think of any lifetime powers that a Medicaid agency could look at in this Veterans Trust and say, ‘oh, we have a problem with that,’” says Peterson. “It’s a more conservative trust, so if you are in a state that has said we don’t like certain lifetime powers, or certain grantor trust powers, then a Veterans Asset Protection Trust can be a great alternative, and obviously it would be used if you were trying to get somebody qualified — a veteran or surviving spouse — for VA pension benefits.”
Implications of the Medicaid Lookback Period
For each of these three asset protection trusts that deal with Medicaid, it’s important to understand the implications of Medicaid’s five-year look back period. Plainly stated, Medicaid can look back over a period of five years when running the financial analysis to determine whether or not someone qualifies for coverage.
Your clients will need to create the trust, transfer the assets to the trust (fund the trust), and stay out of a nursing home (or otherwise not have a need for Medicaid) for at least five years. After the five-year mark is reached, the client will be fully protected and will qualify for Medicaid.
If, on the other hand, your client must apply for Medicaid before the five years is up, you’re your client can choose to be a private pay patient for the remainder of the five year period or Medicaid will assess a penalty period where they will not receive benefits. The length of the penalty period is dependent on the amount of assets transferred and the amount of time that has passed since the transfer.
Since the assets transferred into the Parental Protection Trust belong to the children and not the Medicaid applicant, the five-year lookback period usually won't apply to this type of trust. However, if the parents gift assets to their children to fund the Parental Protection Trust, then that transfer would be subject to the five-year lookback rule.
Parental Protection Trust
ElderCounsel member lawyers recommend establishing this type of trust when traditional irrevocable trust planning isn’t an option (ie: in the state of Minnesota) or in cases where clients can’t use irrevocable trust planning and are limited to giving assets away — usually to children — in order to divest themselves. Or, it can be used when a child has extra money to set aside for the care of their parent. Essentially, this is a third-party special needs planning tactic established for the parents’ benefit.
When children opt to establish a Parental Protection Trust, it allows them to donate whatever funds they wish into that trust for the benefit of the parents. Assets are put into the trust and the funds are preserved until the time of the parents’ death. At the time of the parents’ death, the trust assets revert back to the children.
Another scenario for the Parental Protection Trust — pioneered by ElderCounsel founder Louis Pierro — allows children to fund the trust with ample assets to purchase a life insurance policy with a long-term care rider on the parents. This of course assumes that the parents are younger and healthy enough to be insurable. This is typically an option only for more affluent clients and families.
“It has to be a specific type of policy that provides an indemnity benefit, and not a reimbursement benefit for that long-term care benefit, so that if the parents do qualify for the long-term care rider — meet the requirements for it — then the money for their long-term care, the indemnity payment, comes into the trust,” explains Albee. “It just provides more assets that are then available for the kids to be able to use for their parents’ care. And then at the parents’ death, (what remains of the life insurance) pays into the trust the life insurance benefits, and again, that money comes back out to the kids at the parents’ death. It’s a nice technique if you couple it with Medicaid Asset Protection Trust.”
While asset protection trusts must be irrevocable to safeguard the trust property, they do offer a great deal of flexibility and protection for your clients when it comes to protecting their own property and property that is inherited by their loved ones. By talking through your client’s specific scenario, you will be able to better determine which asset protection trust will best serve their needs.
If you’d like more information or resources on asset protection trusts, contact ElderCounsel.