Anatomy of an Asset Protection Trust

by Porzio Bromberg & Newman, P.C.
​New Jersey care costs related to aging are staggering. Type of Care / Average Monthly Cost Adult Day Care / $1,950 Home Health Aid / $4,576 Assisted Living Facility / $6,065 Nursing home – Semi-Private room / $10,646 Nursing Home – Private Room / $11,863 (Source: Genworth Cost of Care Study 2018)

Misguided Notion – Medicare will cover my care costs as I age. This is not completely true. Medicare will cover doctors, hospitals, possibly prescriptions. However, Medicare will not cover long-term assisted-living activities needed by individuals as they age – such as help with eating, bathing, dressing, moving.

Medicaid could assist with covering the cost of assisted-living activities; however, unlike Medicare, Medicaid is “means-tested”. The bottom line – your resources need to be less than $2,000 to qualify for Medicaid. That is a scary number and place to be.

What can I do to pay for long-term care as I age? Medicaid is only one way to pay for long-term care costs as you age. Some families are able to save and accumulate enough wealth, while others purchase long-term care insurance. However, many families have accumulated enough wealth to be comfortable in retirement, but that comfortable retirement is entirely jeopardized if one spouse becomes ill and begins to incur long-term health care costs.

How does an “Asset Protection Trust” work? In determining whether or not you qualify for Medicaid the agency examines any assets you currently own and any assets that you’ve given away in the past five (5) years. Gifts or transfers that occurred more than five (5) years prior to your Medicaid application are not examined. If you gift assets to a properly designed Asset Protection Trust, those assets will be segregated from your other assets and available to your family, even as your remaining assets are spent down to a point that you eventually qualify for Medicaid. Used strategically an Asset Protection Trust can accelerate Medicaid qualification and create a pool of resources for your family.

What does an Asset Protection Trust look like? To meet your goals an Asset Protection Trust must be carefully designed and funded. You can think of a trust like a small family business where the business is protecting the wealth of the family. An Asset Protection Trust is irrevocable – when money is given to the trust it cannot be demanded back. However, the trust beneficiaries can spend any distribution from the trust as the Trustee deems appropriate.

Grantor – The senior family member who creates the trust and may eventually become the Medicaid applicant.
Trustee – The person(s) who is the “President” of the trust. This can be anyone other than the Grantor or their spouse, and is usually a child or children, perhaps acting with a third party.
Beneficiaries – The people to whom the Trustee can distribute assets during the Grantor’s lifetime and after the Grantor’s death. The Grantor cannot be a beneficiary. The beneficiaries are usually one or more family members and the distribution on death usually mirrors the Grantor’s Will.
Assets / Principal – An Asset Protection Trust can own most anything a person owns, except a retirement account. Your home, savings, CD’s, investment accounts, real estate can all be transferred to the Asset Protection Trust. Once transferred the Trustee will manage the investments and make distributions to the Beneficiaries under the terms the Grantor established when the trust was created. Income – The assets/principal of the trust will generate income each year. That income can either stay in the trust to be managed by the Trustee and distributed to the Beneficiaries, or designed to be distributed to the Grantor.
Income Tax – The Asset Protection Trust can either be a “Grantor Trust” where the Grantor remains the taxpayer, even though she gave all the assets to the trust and has no right to get them back, or a “Non-Grantor Trust” where the trust is a separate taxpayer.
Estate Tax – Given the high estate tax exemptions you want the assets of the Asset Protection Trust to be included in your taxable estate. While there won’t be any estate tax due the cost basis of the assets will “step-up” to the fair market value on the death of the Grantor. This eliminates tax on a lifetime of appreciation.

Is an Asset Protection Trust right for your family? The short answer – it could be. The long answer – your assets (extent and type), family situation and health must all be examined to design an Asset Protection Trust to meet your goals. If you are interested to see if this could work for you and your family keep the five (5) year look back in mind. Time is not on your side when planning for long-term care costs. 1 You can continue to have the right to live in your home even if transferred to the trust through an occupancy agreement or life estate. In both cases you will continue to pay all the upkeep, taxes and maintenance of your home.

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By Deirdre Wheatley-Liss, Principal, Porzio Bromberg & Newman P.C.