Q: I’m still healthy. Why should I care about avoiding nursing home expenses?  

A: Seventy percent of Americans who live to age 65 will need long-term care at some time in their lives. Fifty percent of all couples and 70 percent of single persons become impoverished within one year after entering a nursing home. Given these statistics, you can’t just hide your head in the sand and hope that you are never going to need nursing home care. The best estate plan in the world is useless if you wind up in a nursing home spending all of your money on long-term care.

Q: What is the Asset Protection Trust and how does it work?

A: The Asset Protection Trust is an irrevocable asset protection trust that you create while you are living, that allows you to receive all income from the trust assets, including the right to live in any trust-owned real estate, but you cannot have direct access to principal. If either you or your spouse has direct access to principal, the assets in the trust would be deemed “countable” for Medicaid eligibility purposes and would be completely available to almost all other creditors. Prohibiting direct access to principal is the key to why the Asset Protection Trust works — for general creditor protection and for Medicaid asset protection.

Q: Does the Asset Protection Trust completely avoid probate, just like a regular revocable living trust?

A: Yes, if properly funded. So long as all assets are either titled in the Asset Protection Trust or names the Asset Protection Trust as the beneficiary on death, probate will be avoided.

Q: You say I can’t have direct access to my principal. Does this mean I may have indirect access to the trust principal?

A: Possibly. There are two ways that you might have indirect access to the trust principal. The first way is that the trust is written so that the Trustee has the ability to make distributions of principal to the trust beneficiaries, who are typically your adult children. If the Trustee distributes principal to a trust beneficiary, that beneficiary can then return some of that principal to you or use it for your benefit. There must not be any prior agreement that a trust beneficiary will return some of that principal to you or use it for your benefit. The second way for the settlor to get at the trust principal is for the trust to be terminated as explained below.

Q: I thought this is an irrevocable trust? How can an irrevocable trust be revoked?

A: The Asset Protection Trust is an irrevocable trust, and many people, including a number of good estate planning attorneys, think that means the trust can never be revoked. But the fact is that the term “irrevocable” means only one thing – that the trust can not be unilaterally revoked by the creator of the trust. Although the Asset Protection Trust is irrevocable and can’t be revoked unilaterally by the settlor, under common law and under the Uniform Trust Code, a non-charitable irrevocable trust can be modified, terminated, or partially terminated upon the consent of the trustee and all trust beneficiaries.

Q: What kind of people use the Asset Protection Trust?

A: Typically clients who are in their mid-60s to mid-80s, already retired, and worried about the potential catastrophic cost of long-term care, and they want to protect the nest egg that they’ve been saving for a rainy day. The rainiest possible day for most people is the day they start needing nursing home care, and if they want to truly protect their nest egg and have it actually benefit them when the time comes, they know they need to do something to shelter that money. The Asset Protection Trust, for many people, is the best way to do that.

Q: What about Long-Term Care Insurance?

A: Most Asset Protection Trust clients don’t have long-term care insurance because they’re too old to afford it or to qualify for it, or they have a medical condition that prohibits them from getting it. For many clients, the Asset Protection Trust is the best possible alternative to purchasing long-term care insurance.

Q: What assets can go into the Asset Protection Trust?

A: The main types of assets that should be funded into the Asset Protection Trust are the primary residence, any secondary residence, any non-mortgaged investment real estate, any non-qualified financial investments, ordinary bank accounts, and life insurance.

Q: Are there any capital gains tax implications for selling my home if I have titled my home into my Asset Protection Trust?

A: No. The capital gains tax implications of selling a home from the trust are no different than if you sold it yourself as an individual. The Asset Protection Trust does not affect the capital gains exclusion available to each owner on the sale of a primary residence.

Q: Are there any other tax implications in connection with the Asset Protection Trust?

A: No. The Asset Protection Trust is completely tax neutral – i.e., it will have no effect on your income tax, capital gains tax, or estate tax.

Q: Does a married couple create one joint Asset Protection Trust or two separate trusts? And what happens on the death of the first spouse?

A: A married couple will typically create two separate trusts, and typically nothing changes on the death of one spouse, as both trusts were already irrevocable prior to death. For married couples with estates larger than the Estate Tax exemption equivalent amount, the Asset Protection Trust is designed to utilize both exemptions.

Q: Are there any assets that can’t go in to the Asset Protection Trust?

A: The assets that shouldn’t be transferred into the Asset Protection Trust are your qualified retirement plans (e.g., IRAs and 401(k) plans) and your primary checking account. Most states treat qualified retirement plans as countable resources for Medicaid, so if you want to protect the assets in your qualified retirement plan from Medicaid by using the Asset Protection Trust you will need to cash out your retirement plan first, and pay any income taxes that are due as a result of terminating the plan. We usually do not put annuities into the trust either, but it depends on the type of annuity.

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