While most of my clients are not a part of the so-called ‘me generation’, who among us would not love to have their proverbial cake and eat it too? This is just one of the advantages of a few carefully drafted lifetime asset protection trusts. These trusts include the Medicaid Asset Protection Trust (MAPT), Veteran's Asset Protection Trust (VAPT), Domestic Asset Protection Trust (DAPT), and Standalone Retirement Trust (SRT).
Medicaid Asset Protection Trust and Veteran's Asset Protection Trust
Medicaid Asset Protection Trust and Veteran's Asset Protection Trust help clients qualify for either Medicaid or the VA’s Aid & Attendance program or both while simultaneously providing asset protection to trust assets. In some cases, these trusts could also provide a potential an income stream for the benefit of the well spouse. These irrevocable trusts preserve the client’s basis adjustment at death so that the beneficiaries can avoid the capital gains one would otherwise be required to pay with a transfer to an irrevocable trust or on a gift. In addition, placing the personal residence in this trust protects this valuable asset from Medicaid spend-down and preserves both the capital gains exclusion on any sale of the home during the client’s lifetime as well as providing a ‘step up in basis’ to the beneficiaries at the client’s death. This remains an important planning goal for many clients whose equity in their home is a large part of their estate.
These trusts will also allow your assets to avoid ‘estate recovery’ at your death. Estate recovery occurs when the Medicaid agency requires the decedent’s estate to reimburse them for the Medicaid benefits that were received during the decedent's lifetime.
Although the federal and state governments jointly fund Medicaid, each state sets its own rules and guidelines for Medicaid eligibility and estate recovery. Therefore, Medicaid Asset Protection Trusts must be tailored to the laws of the state where you live. Although qualification for Aid & Attendance benefits can be immediately available to the Veteran and their spouse upon execution of a Veteran's Asset Protection Trust, the Medicaid Asset Protection Trusts will be subject to a look-back period of five years so the earlier you plan in advance for your long term care need the more assets you will be able to preserve.
Domestic Asset Protection Trusts (DAPT)
The goal of a DAPT is to allow the client to fund the trust with his or her own property and maintain some degree of beneficial interest in the trust assets, yet protect trust assets from the client’s creditors. Currently, 16 U.S. states including Virginia permit the creation of DAPTs and the number will likely continue to grow, although laws vary widely from state to state.
The laws governing DAPTs are relatively new and still evolving. U.S. courts have very limited legal precident to guide their decisions. It is important to note however, that under bankruptcy law, assets remain exposed to creditors’ claims for ten years. Nonetheless, a DAPT can be a powerful asset protection strategy.
Standalone Retirement Trusts
Because of the recent U.S. Supreme Court decision in Clark v. Rameker (which held that an IRA inherited by a non-spouse beneficiary is not protected from the beneficiary’s bankruptcy creditors) the Standalone Retirement Trust has become an important vehicle for protecting retirement accounts from the beneficiaries’ creditors.
Although asset protection trusts must be irrevocable to safeguard trust property, they offer a great deal of flexibility for clients looking to protect their own property as well as property gifted to or inherited by loved ones. Since this type of planning can be complicated it should not be attempted without the assistance and counseling of an experienced attorney. We are here to answer your questions about trust-based asset protection strategies and advise you on your options for planning. Visit us on the web at zarembalaw.com and sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Ref: The Wealth Counselor, Volume 9, Issue 9