Asset protection can be defined as a set of strategies and legal tools that lawyers use to protect assets from lawsuits and claims of creditors. In our office we use an asset protection trust to protect your assets from being spent on long-term care, whether it be in a nursing home or other type of assisted living facility. Below we’ll discuss the asset protection trust and why it’s such a valuable tool for estate planning.
The average cost of a nursing home in Georgia is somewhere between $90,000 and $100,000 per year. Assisted living is usually between $85,000 and $95,000 a year and home care can be as much as $60,000 a year. It doesn’t take a mathematician to realize that these costs could quickly drain the assets you’ve accumulated over your lifetime.
If you require nursing home care, your spouse still needs money for living. That’s where the asset protection component comes in handy. We want to make sure your spouse still has a comfortable standard of living if you need nursing home care. Even if you’re in a nursing home, your spouse would still have pay taxes, insurance, upkeep, and maintenance on your home. This is why it’s so important to plan.
If you require nursing home care and want Medicaid to pay for it, your assets cannot exceed a certain amount. Currently the person needing nursing home care can’t have assets exceeding $2,000 and the spouse remaining at home can’t have assets above $138,000. That’s not much at all, so we have a significant amount of assets that need preserving in most cases.
What Does an Asset Protection Trust Do?
A properly established asset protection trust performs three primary functions:
1. We’re trying to avoid “spend down.” We don’t want you to have to spend $100,000 of your assets each year for nursing home care. And if you have land and other properties, we want to preserve those for future generations.
2. We’re trying to preserve your assets for your long-term health and well-being.
3. We’re trying to protect your children from creditors.
The nursing home asset protection trust will hold certain assets and those assets are not counted for Medicaid eligibility purposes. There is a time frame that we have to consider here. We have to make sure the assets are put into the trust prior to the “look back” period, which we’ll discuss below.
There are certain assets that we don’t put in this type of trust. We don’t put IRAs or 401ks in there. We also don’t put your Social Security, pensions, or any required minimum distributions inside the trust. We’re basically leaving your income outside the trust, but using the trust to preserve assets like houses, real estate, farmland, and other highly valuable assets.
The big caveat to this type of trust is that you don’t have access to the assets once they are placed inside the trust. Once inside the trust, the assets are not accessible to your spouse. They are only accessible to your “lifetime beneficiaries,” often children or close relatives. You can’t have direct ownership of these assets once they are placed inside the trust. This is the key to avoiding “spend down” and helping you qualify for Medicaid to pay for nursing home care.
Some clients will ask, “why not just gift the house to my children or put their name on my checking account?” This can work, but it still doesn’t protect your assets from creditors. Maybe one or more of your children are involved in a messy divorce or have creditor issues? If the assets are inside the trust, they can’t be taken by a former spouse or creditors.
Many clients are initially hesitant to create an asset protection trust because they don’t want to lose control of their assets. But after we discuss the important features and benefits of the trust, they almost always agree that it’s the best way to preserve their estate. The benefits of the trust will far outweigh the loss of control.
The Look Back Period
As mentioned earlier, these types of trusts are always going to be subject to the look back period for Medicaid eligibility. Currently that period is 60 months. So we have to ensure that the trust is created and funded 60 months prior to you or your spouse needing long-term care.
This look back period allows Medicaid 60 months to look into your bank accounts, assets, and other financial transactions to see what has been transferred within that time frame. If you transferred something within 60 months of applying, there would be a penalty. They basically deem you ineligible for a period of months until you make up that gift.
Asset Protection Trust vs. Revocable Trusts
It’s important to note that these asset protection trusts are different from a living trust, also known as a revocable trust. A revocable trust is used mainly to avoid probate and to assist with asset management and financial decision making. You don’t get the same asset protections with a revocable trust.
The revocable trust allows you to put assets into the trust to be managed by you alone or with someone else. You still get to manage your assets and income inside the revocable trust. You can also receive income from the trust and get principal out the trust. You have complete control with a revocable trust, whereas you don’t with the irrevocable asset protection trust. Both types of trusts do avoid probate, but one is better suited for asset protection.
In summary, you need to engage in asset protection planning prior to a major life incident requiring that you be placed in a nursing home or other protected environment. Anything can happen anytime during the day or night. You could have a heart attack, stroke, or other catastrophic health issue without notice. You need to proactively plan versus trying to plan in a crisis. We make better decisions and have more techniques available to us when we plan in advance. Plan now for your future.
Contact Us So We Can Help!
If you need assistance with creating an asset protection trust, complete this form or give us a call at (229) 226-8183. If you’d like to see this blog in video format, you can watch it below. Please be sure to SUBSCRIBE to our YouTube channel and click the bell notification button so that you’re notified each time we publish a new video.