Part Four: Asset Protection Planning

The two main vehicles for asset protection planning -- in the event you may need long-term care services – are long-term care insurance and the Medicaid Asset Protection Trust (MAPT).  Long-term care insurance is nice if you can get it, but the vast majority find it either too expensive or they cannot qualify for medical reasons.

Many people opt for “Plan B”, the Irrevocable Medicaid Asset Protection Trust.  This is the famous trust with the five year “look back” period for nursing home care.  Any assets you put into the MAPT  today are protected from long-term care after five years have passed.

While both the revocable and irrevocable trusts avoid probate at death and prevent guardianship proceedings if you become disabled, only the MAPT protects your assets from home and nursing home care costs.  In the revocable trust, you are in charge and may take your assets out at any time – so if you have to ever go into a nursing home they will require you to take it out and give it to them.  If you can get it, they can get it.

The MAPT sets up two roadblocks that Medicaid and nursing homes cannot break through.  First, you must choose someone else as Trustee.  Since the Trustee is in charge they can take it out, so if its you then you have access and they will make you take it.  Most people choose one or more of their children as Trustees.  The assets in this trust may still only be used for your benefit but they act as a “manager” for you.

The second roadblock is that in the MAPT you may only take income from the trust – in fact, they are called “income only” trusts.  For example, if you transfer stocks to the trust you may only take the income, if CD’s you may only take the interest, etc.  However, if you put your house into the trust it does not earn income so you get the equivalent – “life rights” or the exclusive right to use and enjoy the premises for your lifetime.  On your death, the assets go to your children’s Inheritance Trusts free of the expense and delay of probate.

Who sets up these trusts and why do they do it?  Middle class people, generally around seventy, give or take a few years, have a lot of assets they are not going to spend, especially the house.  What happens if you own a home and end up in a nursing facility?  The county puts a lien on your home for the cost of care and, before you know it, the lien exceeds the value of the house and the county walks away with it.  This is totally unnecessary.  For more than thirty years, you have been allowed to put that home into the MAPT and if you need care anytime after five years they can’t touch it.

So first we move to protect the house.  Let’s say your name is Mary Jones and your daughter is Cindy Jones.  The property would be deeded to: “Cindy Jones, as Trustee of The Mary Jones Irrevocable Trust”.  The trust provides that Mary has the exclusive use and enjoyment of the home for her lifetime.  She keeps her property exemptions, STAR, Veterans, etc.  The trust may sell the house at any time.  In that case, the money is paid to the MAPT and the trust may go out and buy a condo for example and it is still protected – you don’t start the five years over again.  Since there is no downside, it makes sense to protect the house. 

Now let’s look at your other assets.  Certain assets are exempt from Medicaid.  They cannot get any of your retirement accounts, IRA’s, 401(k)’s, 403(b)’s, etc.  However, since you have to take the RMD (required minimum distribution) after 70 ½, the nursing home gets that income.  Might be the two or three thousand a month you have to take out.  They money inside the retirement plan cannot be touched by Medicaid.

We are concerned, however, for those who have a nest egg that is non-IRA money that they don’t need to live on.  Many clients tell us they have money in the bank or investments that they are not spending since they have enough income.  Other clients advise they are only taking the earnings from their investments.  Remember, the trust gives you the earnings.  Our view is that if you have assets that you don’t need to live on, then you’re actually safekeeping them for the nursing home industry!

Why not put those assets into the MAPT?  They’re still there when you need them but no one can come and take them away from you.

A few words about the operation of these MAPT’s.  First, even though you named a son or daughter, or both, as trustees you reserve the right to change the trustee at any time.  That means you keep control – they are in charge of the trust but you are in charge of them.  Secondly, although you cannot take out principal there is a workaround should you need to get money out.  You are allowed to make gifts from the trust to your children without violating the Medicaid look-back rules.  These gifts can be for virtually any amount tax-free.

Any money needed for repairs, improvements, taxes or insurance on the house may be paid for by the trust.  Since the house is in the trust and the money is in the trust this is not considered as taking money out of the trust.  Further, assets in the trust may still be used for your benefit.  So let’s say you want to buy a condo in Florida.  The trust buys the condo and, assuming the five years has passed since you opened the trust, it is already protected by the trust from long-term care expenses.

Finally, many people are understandably afraid of the word “irrevocable”.  Fear not!  In New York you may revoke an irrevocable trust provided all the parties named in the trust agree in writing.  Since it is only you and your immediate family this is generally easy to accomplish.  This means the MAPT is like having your cake and eating it too – you have the protection so long as you want it and, if you change your mind for any reason you can undo it – so you can always have control over your affairs.

Conclusion: An Elder Law Estate Plan Covers All Your Bases

With one comprehensive plan you can keep control of your affairs by (1) ensuring the people you choose will take over later on should you become disabled (2) avoiding the expense, delay and publicity of a probate court proceeding (3 keeping the inheritance you leave in the bloodline and protecting it from children’s divorces, lawsuits and creditors, and (4) protecting your assets from being lost to long-term care expenses.