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Using Trusts for Long Term Care Planning

February 13, 2019

Since the Deficit Reduction Act of 2005, trusts have become an increasingly popular tool for asset protection in long term care planning. This legislation increased the look back period from three years to five years for gifts to individuals, but maintained the five year look back period for gifts to trusts. Therefore, a gift to a trust has the same five year lookback as a gift to an individual.

Why use a trust for long term care instead of gifting assets to a child? There are many reasons a trust is preferable for asset protection in long term care planning than an outright gift to a child. First, a child may suffer through a divorce and lose some of the gifted assets to a former spouse. Second, a child may predecease the spouse with the child’s spouse or descendants ultimately owning the property. Third, if a child receives the assets, and later has problems with creditors, the child’s creditors may be able to seize the gifted assets. With a trust, many of these issues can be avoided. In addition, a trust can provide some legal accountability among the family members.

How does the Trust work? The creator of the Trust names a Trustee to handle the investment of assets held by the trust and make distributions of trust assets as detailed in the trust document. The trust will also name beneficiaries of the trust. These individuals are entitled to distribution of trust income and/or assets. If the trust is drafted properly, the trust assets may be protected from a beneficiary’s creditors. The Trust may have different beneficiaries during the creator’s lifetime and at the creator’s death. In most cases, any individual should wait at least five years before filing a Medicaid application after transferring assets to an irrevocable trust.

What type of Trust will not count as an asset for Medicaid or the Veterans Administration? The Trust must be irrevocable. If the creator of the trust can revoke or amend the trust, it is considered a countable asset of the creator of the trust. Furthermore, the creator of the trust generally should not be a beneficiary of the trust. If the creator of the trust can receive income or principal from the trust, Medicaid will count as a resource whatever the creator/beneficiary can obtain from the trust.

Who can be Trustee? In most cases a child of the creator serves as trustee, but other individuals or corporations may serve as Trustee. It is important that the creator of the trust or his or her spouse never serve as Trustee. George Burdette, former head of South Carolina Medicaid, stated that if the trust creator has control over the assets of a trust, Medicaid will count the trust assets as countable resources of the trust creator. Control is tantamount to ownership.

What assets may fund a trust? Almost any asset can be used to fund a trust for long term care planning, including real estate, stocks, bonds, cash, even a personal residence. An important exception is retirement assets, such as an IRA or 401(k) which cannot be transferred to a trust, in most cases, without incurring income tax liability. Please note that certain assets, such as a personal residence, may require unique provisions in the trust document to maintain property tax advantages.

Should I use a trust to protect my assets and meet my long term care planning objectives? Each individual’s situation is unique. Irrevocable trusts are a proactive measure and often a desirable means of preserving assets. An ideal candidate is someone with significant assets and who probably will not need nursing home care for five or more years for Medicaid purposes. Since the Veterans Administration currently has no look back period, an irrevocable trust may be desirable for immediate access to benefits in some circumstances. However, please note this may cause issues if Medicaid is needed within five years.

As one can see, an irrevocable trust concerns very complex issues that should be discussed with an attorney in drafting the document. Therefore, I recommend that individuals interested in creating an irrevocable trust contact an attorney at law experienced in handling issues of particular importance to seniors.

Michael B. Bridges, Attorney Dobson, Jones, Ball, Phillips and Bridges
Bill Sweezy
(704) 965-2868