Do you have the right kind of trust?
Many of our clients come into our office with trusts. Most of the time these trusts are what are called revocable living trusts (RLTs). These types of trusts offer no asset protection even though seniors are often ready to conclude that they have protected their assets with such a trust.
Only certain types of irrevocable living trusts (IRTs) provide asset protection for long-term care. Irrevocable trusts, if drafted properly, may be considered a complete gift by the senior to the beneficiaries of the IRT, and thus out of the senior’s estate permanently. If, however, the senior has any access to principal in the IRT, then the IRT will not provide any asset protection from the costs of long-term care.
It is possible to allow seniors to maintain an income interest in the IRT, as opposed to an interest in the principal of the IRT, but this creates a more complicated audit process if and when the senior ever needs to look to the Medicaid program to pay for the costs of long-term care. About 66% of all US citizens will be looking to the Medicaid program if long-term care is needed.
Therefore, it is increasingly important to properly draft an IRT and also understand the time of the creation and funding of the IRT so that the creation of the trust will not interfere with a possible application for Medicaid to cover the costs of long-term care.
Seniors also have to keep in mind that there are significant issues in the drafting of an asset protection trust that deal with the following:
- Income tax issues
- Gift tax issues
- Estate tax issues
- Medicaid eligibility issues
- Issues about the right beneficiaries, receiving the right assets, at the right time
- Trustee issues
- Using the IRT in a period of health for the senior versus a health crisis for the senior
- Issues regarding selecting the right assets to place in the IRT
So you see, asset protection trusts are essential for many seniors, because they may be the only way assets can be protected, not only from the cost of long-term care but also the predators and creditors of their beneficiaries.
But the drafting of an IRT is much more complex than the drafting of an RLT and seniors need to make sure that they retain an elder law attorney to maximize the chances that their trust is the right trust for them at that point in their life.