How do you protect assets in the event of a long term care situation? I am asked what the difference is between the revocable living trust (RLT) and the irrevocable Medicaid trust (IT). Are there differences between these types of trusts and how can each be of benefit?
In a Revocable Living Trust, you and or your spouse if you have one, normally act as the trustees of the trust. The trustee makes decisions about what assets are in the trust and should assets be removed. The rule of thumb is this..Ħħif you can control or remove the asset then it can be attached for long term care expenses.Ħħ
Many people like to plan ahead and protect their assets. As people get older concern grows of losing some or all of their assets to a nursing home and they begin to seriously plan and consider their options to protect assets. Long-term care insurance may be too expensive for many people or they do not qualify medically.
The other options are these:
Transfer the assets outright to your children or set up an Irrevocable Trust.
There are pros and cons for each choice. Transferring the assets to your children may put the assets at risk. Your children may divorce, die, owe taxes, be sued, file bankruptcy or be spendthrifts.
With the Irrevocable Trust you are protecting the assets because whatever amount you put into the trust is not assessable for your long term care expenses. Your heirs can be named as trustees and they are not the owners. The trust is the owner of the assets and these assets are safe from creditors. They can only do what the trust allows them to do, which is to provide you a designated income.
The best method of using the Irrevocable Trust is to place two major roadblocks that they simply cannot get through. First, appointing a trustee will remove control of the asset from you. Generally the trustee is one or more of your adult children. Most of these trusts allow you to retain control over changes in the trustee so ultimate control of the trust is still yours.
Secondly, you must limit yourself in the Irrevocable Trust to the income only. Often these trusts are called income trusts. Generally the assets are placed in no risk investments such as insurance company annuities or bank CDs. Interest is then removed to provide the necessary income. Situations occur where real estate such as a home is placed in the trust and permission to live in the home is granted by the trust. At death the assets in the trust are passed through to the beneficiaries of the trust, your heirs.
The trust is used for income but the assets in the trust can be bought and sold. This allows for control over the reallocation of assets based on needs and market changes and conditions. The trustee can sell assets and reposition them in a beneficial manner based on sound business decisions.
Other benefits that are available to the trust is you are allowed to gift assets out of the trust. These gifts can be to your children or anyone you desire and they are free to use the asset any way they wish, even provide you with the benefit of the gift. The last benefit is the revocation of the trust. If the beneficiaries of the trust agree, the truest can be revoked and assets placed back under your ownership. This is done in writing and with the guidance of a legal provider. The IRS must also be notified of the trust being revoked.
Assets can be protected and if a situation occurs regain ownership in the future...
Warning: Never undertake a complex plan such as a trust or other asset protection plans without legal and tax planning advice. Always ask for a second opinion and make fully sure you understand all possible implications before entering into any legal document. Seek competent advice.
Bill Broich heps seniors manage their retirement savings. Visit his website for more information: Annuity.com
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