Asset Protection Trusts: Help for Seniors

An asset-protection trust can help seniors in need of constant nursing care pay the substantial costs of assisted living or skilled nursing facilities and at-home help. Average daily nursing home costs can exceed $297 and can be significantly higher in certain metropolitan areas, according to a 2021 Genworth survey.

Medicare, the federal health care program for seniors aged 65 and above, only covers nursing home expenses when one enters a facility for short-term rehabilitation. Medicaid, a joint federal and state program, can cover the balance. But in order to qualify for the latter, a person’s total countable assets—including cash in bank accounts, plus investments such as mutual funds, stocks, and bonds—can’t exceed $2,000 to $3,000, depending on the state.

People often exhaust their life savings before Medicaid kicks in, making it difficult to leave an inheritance or to provide for surviving dependents. By shifting assets into an irrevocable trust, individuals may qualify for Medicaid, while preserving a portion of their wealth for their loved ones.

Key Takeaways

  • Medicaid can provide assistance for those who need to relocate to an assisted living facility, but this program only kicks in for individuals with a low amount of assets.
  • By placing assets into an irrevocable trust, a person can qualify for Medicaid and still preserve a portion of their assets for loved ones.
  • Medicaid imposes a five-year “look back” period, where any money transferred into a trust five years before a person applies for Medicaid may delay the benefits from kicking in.

How Do Trusts Help Protect a Senior’s Assets?

The two basic kinds of trusts are revocable and irrevocable. As the name implies, revocable trusts can be revoked. Medicaid considers assets in such a trust to be still owned by the person who established it. And if that amount exceeds the countable assets limit, they won’t qualify for assistance.

On the other hand, an irrevocable trust effectively lets a person transfer control of their money to a trustee, allowing them to qualify for Medicaid. Note that there is a lag time, due to Medicaid’s current five-year “look back” period. Any money transferred into a trust five years before a person applies for Medicaid may delay the eligibility for benefits. The length of the delay, known as the “penalty period,” is determined by dividing the value of the transferred funds by Medicaid’s “regional rate” for nursing home care, in a given region. 

For example, in an area with a regional rate of $10,000 a month, an individual who transfers $100,000 into a trust before entering a nursing home would be ineligible for a total of 10 months of Medicaid assistance. In this case, someone (typically a family member) would have to pay the nursing home out of pocket before Medicaid began covering the bills, which effectively wipes out any advantage of putting $100,000 into the trust. Alternatively, if that individual transferred the assets more than five years earlier, they could immediately qualify for aid.

A trust is a separate legal entity, so the money is generally safer than it would be if it were simply handed to a family member, who may be vulnerable to lawsuits, divorce, or other misfortunes that may put that money at risk.

Tax Advantages of a Trust

Trusts also offer tax advantages. Assets in a trust benefit from a step-up in basis, which can mean substantial tax savings for the heirs. By contrast, assets that are simply given away during the owner’s lifetime typically carry the original cost basis.

Consider the following example. Let’s assume that shares of stock costing $5,000 when originally purchased are worth $10,000 when the beneficiary of a trust inherits them. In this case, that stock would have a basis of $10,000. Had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. Later, if the shares were sold for $12,000, the person who inherited them from a trust would owe tax on a $2,000 gain, while someone who was given the shares would owe tax on a gain of $7,000. Simply put: the tax consequences on assets received from a trust are greatly reduced.

By combining the creation of an irrevocable trust with a promissory note or the purchase of a private annuity, people may still preserve 40% to 50% of their assets.

The Importance of Choosing the Right Trustee

A properly-drawn trust will not only preserve an individual’s assets but also give trustees the discretion to distribute money to beneficiaries, who in turn can spend it for the older person’s benefit. For this reason, it’s essential to appoint a reliable person as trustee.

You can also name a bank as either the trustee or a co-trustee.

The Bottom Line

People who need financial assistance from Medicaid don’t necessarily have to exhaust their life savings in order to qualify for aid. A properly-drawn irrevocable trust can protect at least a portion of their assets, both for their own benefit and for that of their heirs.