How do I protect my house? My family camp? My life savings? Those are the most common questions I hear when meeting with a client to discuss planning for long-term care. Long-term care services can include a variety of supports in a facility or in the home. These services are extremely expensive. Seventy percent of people will need long-term care during their lifetime, and the average amount of time for which some type of long-term care will be needed is three years.
Facing these staggering costs, and with either no or inadequate long-term care insurance, most people will choose to apply for MaineCare (Maine Medicaid) long-term care benefits, which are administered by Maine’s Department of Health and Human Services (DHHS). While the MaineCare rules allow some strategies to preserve assets in a health crisis, a person often can preserve more assets and have more options by doing advance planning.
Planning strategies often involve transferring assets outside of the client’s ownership and control so that they are not counted as an asset for MaineCare eligibility purposes or subject to estate recovery after death. Federal law requires that states seek reimbursement from the estates of people who are fifty-five years of age or older and have received medical assistance through Medicaid. Certain assets, such as a personal residence, that are exempt assets for eligibility purposes, are still exposed to estate recovery unless an exemption applies.
An asset protection trust is one strategy to consider when planning for long-term care expenses. This type of trust is specifically designed for MaineCare long-term care benefits eligibility. The person or couple who establish the trust are called the “settlor” or “settlors.” Distilling an asset protection trust down to its six most basic characteristics, it is:
- An irrevocable trust where
- The settlor retains no control, and
- The settlor may not be a beneficiary, which
- Prevents trust property from being counted as an asset when applying for MaineCare long-term care benefits, and
- Protects property from future estate recovery claims by DHHS for the amount of long-term care benefits paid,
- While retaining certain protections for the settlor.
Holding assets within an asset protection trust is typically recommended over outright gifting of assets for a number of reasons. This is because the trust:
- Provides structure for how assets should be managed during the settlor’s lifetime in case trust assets need to be accessed;
- Outlines what will happen to the trust property after the settlor’s death to ensure that the settlor’s wishes are followed;
- Allows the settlor to change his or her mind about the after-death distribution of trust assets;
- Promotes transparency and family harmony;
- Preserves the step-up in tax basis on assets that have appreciated in value to minimize or eliminate the amount of capital gains tax paid when the property is later sold;
- Preserves the capital gains tax exclusion in case the personal residence is sold during the settlor’s lifetime;
- Provides creditor protection from family members’ liabilities and life changes;
- Prevents the trust property from being a countable asset for any income- or asset-based benefits that family members receive; and
- Through a life lease, preserves the settlor’s right to remain in the home, and clarifies expectations for the payment of property expenses to prevent DHHS from later penalizing the settlor making payments to maintain property that is no longer owned by the settlor.
Ultimately, the best way to determine whether an asset protection trust is appropriate is to meet with an attorney who can evaluate your circumstances. There are, however, some primary factors to consider in evaluating whether an asset protection trust may be a good fit. First, you must feel comfortable giving up ownership to the family member or friend whom you name as trustee and retaining only minor forms of control over the trust property. To hand over control, you must have complete confidence that people you name in the trust will carry out their assigned roles as instructed.
When a person applies for MaineCare long-term care benefits, the DHHS case worker reviewing the application performs a look-back over the past five years’ of financial transactions. Transfers of assets made within that time for less than fair market value that do not fit within an exemption will be penalized. Therefore, you must be generally healthy or have robust long-term care insurance coverage to be as confident as possible that you will not need to apply for MaineCare long-term care benefits before the look-back period is past.
Finally, you must have assets that are appropriate to transfer into the asset protection trust. Often, these trusts are funded primarily with real estate. This is because even real estate that is an exempt asset during lifetime is generally exposed to estate recovery after death. You would not want to fund the trust with retirement assets or any other liquid assets which would have significant tax consequences if transferred or cashed out. Depending on your goals, you might decide to transfer a portion of any other liquid assets into the trust.
Despite some of the complicated details that must be worked out when considering and drafting an asset protection trust, this type of trust can provide enormous value for the right person. The trust ensures that a significant portion of your assets are protected against any future long-term care expenses. At the same time, even though you give up ownership and control over property placed into the trust, the trust protects the key tax benefits associated with ownership, preserve the right to continue to use the property, and maintain the right to change your mind about what happens to trust property after death. By planning for the future with an asset protection trust, you can create peace of mind for yourself and transparency about financial planning for your family.
 How Much Care Will You Need?, U.S. Dep’t of Health and Human Servs., http://longtermcare.gov/the-basics/how-much-care-will-you-need.html (last visited June 27, 2017).