In order to protect one's assets from long-term care expenses there must be some form of divesting oneself of one's assets. The simplest way to do this is to simply turn over assets to your beneficiaries.
The problems with turning over your assets completely to your children are numerous. What if a child gets into financial trouble, gets sued or passes away; or, what if a child all of a sudden decides he no longer likes you.
Additionally, if you transfer assets to your children, oftentimes they will now be responsible for paying the income taxes generated by such transferred assets.
For these reasons, and others, most of our clients are not completely comfortable with a simple transfer of assets to their children. It is a common recommendation by our office that people explore the possibility of establishing an irrevocable trust, which allows them to remove assets from their name but still maintain some control over them.
It is important for me to point out that a revocable trust is one that may be changed or amended by the person who has created it. While these trusts are very flexible and wonderful tools for avoiding probate, the Medicaid authorities would consider the principal of such trusts to be assets that are countable in determining Medicaid eligibility. In other words, assets in revocable trusts need to be spent down before one could obtain Medicaid eligibility. For these reasons revocable trusts are not an effective tool in Medicaid planning.
Irrevocable trusts, on the other hand, may not be changed or amended after the trust is created. Generally, these trusts are created so that the income remains available to the person who established the trust for her lifetime. These trusts are commonly referred to in the estate planning arena as "income-only trusts."
These trusts ensure that the principal cannot be applied for the benefit of the person who has created the trust. Rather, the principal can only be paid to the children of the person who has established the trust. Accordingly, the funds in the trust are protected from nursing home costs, assuming that the trust has been established for more than five years before applying for Medicaid.
Additionally, most "income-only trusts" are drafted so that the trustor, the person who established the trust, still remains the taxpayer for any income generated by the trust assets.
Another advantage of irrevocable trusts is that they allow one's estate to pass to one's heirs without having to pass through probate. This can save both time and money. The probate process can be expensive - in particular, for rather large estates.
If you would like to submit a question for publication, email it to email@example.com. Jeffrey J. Rokisky is an elder law attorney with offices in Wheeling, Weirton, Elkins, Clarksburg and Robinson Township.