I often counsel people on the importance of preparing an estate plan long before a tragedy occurs. Proactive planning generally can be much more protective than crisis planning, particularly for long-term care costs.
Because Medicaid has a five-year lookback period, we usually try to protect property at least five years before the individual would enter a long-term care facility. For those already in a care facility, we work to save what we can, but the protection often is much less than it could have been had planning been done sooner.
However, in many cases, families see a decline in their loved one and suspect long-term care may be necessary in the near future. In those cases, protecting property through an irrevocable grantor trust may not be the best option.
Irrevocable grantor trusts used for asset protection can be powerful tools. They have significant benefits to both grantors and their beneficiaries. During the grantor’s life, property within the trust can be safe from creditor claims – with some exceptions – and the grantor can continue to receive any income the trust property generates, such as dividends. Beneficiaries receive the benefit of a guaranteed inheritance, outside of probate, with specialized provisions which protect any disabled beneficiaries.
The biggest problem with the irrevocable grantor trust is the grantor must give control of the trust to someone else and the principal – not the income – within the trust cannot be used to pay for expenses of the grantor.
Irrevocable grantor trusts work beautifully for those who exercise advanced planning techniques and who only include property they intend to pass on to beneficiaries. However, for seniors whose loved ones already are handling all of their finances and who are unsure whether they will remain out of long-term care for five years, a special needs trust may be a better option.
Special needs trusts generally are broken into two categories. First party special needs trusts are created and paid for by the individual, which usually creates immediate eligibility for Medicaid benefits. These trusts include a payback provision to the state for money paid out by Medicaid on behalf of the individual and they are not allowed to be created for anyone over 65 years of age.
Third party special needs trusts are created and paid for by someone other than the disabled individual, include no payback provision to the state and have no age limit.
Third party special needs trusts can offer a good way to provide for the ongoing care of a loved one, while still protecting assets.
In order to use a special needs trust for a parent, the parent must gift assets to children, who then gift assets into the trust for the care of the parent. The parent still gives up control of the property, but the assets can be directly used for the parent’s care and expenses.
Special needs trust planning for a parent does not negate the five-year lookback. The transfer to the children still is an uncompensated transfer. However, the transfer can start the clock rather than simply waiting to see what happens. Until the individual actually goes into long-term care, the trust can continue to pay for expenses directly, even including assisted living and household needs.
Using special needs trusts for parents is another powerful tool to protecting individuals and their property, but it is certainly not for everyone. The senior’s wishes for distribution must carefully be followed and family members must be willing to work together for the best interests of their loved one.
In close-knit families that already have taken on the burden of managing a parent’s finances, a special needs trust may be a great estate planning tool.
This article originally appeared on The News-Enterprise.
