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5 Great Benefits Of Establishing An Asset Protection Trust

Aging seniors in New York who need long-term care, especially if they are still in their homes, are often advised to create an Asset Protection Trust.  Why take this step?  It turns out that there are a number of excellent reasons.  Your money will last longer while you are alive, and the trust serves as the centerpiece of your estate plan once you pass on.

Here are five reasons why an Asset Protection Trust is such a powerful tool for seniors in New York:


  1. Creating an Asset Protection Trust is an excellent way to help you achieve Medicaid eligibility.

If you live in the community, or in assisted living, putting most of your assets into this kind of trust means that you will very quickly become eligible for Community Medicaid, which will pay for your home care, your adult day care, or your assisted living.  What about the five year “look back” everyone talks about?  In New York, for Community Medicaid, there is NO look back.  The look back period applies only to Medicaid Nursing Home applications.

While you cannot have any power to control or withdraw the assets held by the trust, your Trustee – who could be your child or sibling – can be given the power to make distributions to beneficiaries during your lifetime.  The beneficiaries – who could also be your child or sibling – are free to use the money they receive from the trust to pay for the things that you need or want.

You may retain other rights under the trust, such as the right to receive all of the income generated by the assets held in the trust, and the right to change the beneficiaries of the trust.

Medicaid requires that your “surplus income” be contributed toward the cost of your care, but you can protect your income as well by means of a different type of trust, a Pooled Income Trust.  More information about this trust can be found here.

  1. Avoid the risks of transferring your assets to your children.

When seniors need to transfer their assets in order to become eligible for Medicaid, their first thought is often that the easy thing to do is to give their money to their children “for safekeeping,” and have their children use it only for them.  However, doing so can have serious negative consequences.  First, while you and your children may consider the money to be yours, legally it is not.  It belongs to them.  Their present or future creditors will have a claim on “your” assets.  If your children are the subject of a lawsuit, declare bankruptcy, get divorced, or die before you do, your money would be at risk.

In addition, your children could be tempted to use your money for themselves.  They would reassure themselves with the idea (realistic or not) that they would “pay it back” if you needed the money.  That’s a slippery slope, and you have no control over what they do.

  1. An Asset Protection Trust will be the centerpiece of your estate plan.

The trust names beneficiaries and can include any provision that you would consider putting in your Will.  Essentially all your assets will be in the trust, so it will control the distribution of your assets upon your death. There are reasons you may still want to have a Will, but under many circumstances, it would not be needed at the time of your death.

  1. Having your assets distributed under a trust means you avoid probate.

If there are assets in your name at the time of your death, they cannot be distributed to your heirs or beneficiaries without a court proceeding called “probate” if you have a Will, or “administration” if you do not.  However, any assets that are in the trust are not yours – they belong to the trust.  Therefore, the assets held by the trust are not subject to probate or administration.

Probating a Will is expensive and time-consuming and can lead to conflict.  All beneficiaries and potential beneficiaries are legally required to be notified and are permitted to object to the Will in court.  A properly structured trust has instructions as to how to distribute assets and to whom – and nobody other than named beneficiaries is required to be notified.

  1. There may be significant tax benefits when your assets are distributed under a trust.

When assets are distributed under a trust (or otherwise inherited), the beneficiaries receive a “step up” in tax basis, meaning that they will pay no tax on the appreciation in value that occurred during the lifetime of the person who created the trust.

A simple example, using a house, will illustrate how this tax benefit works:

If 30 years ago you bought a house for $50,000, your $50,000 investment is called your “basis” in the house.  If the house is now worth $450,000, and you sold the house today, your “capital gain” on that house would be $400,000.  If you give the house to your children while you are alive, their basis in the house would be the same as yours – $50,000.     Whenever they sell the house, they would owe capital gains tax on the total increase in value, including the unrealized capital gain of $400,000 that accrued while you owned the house.

However, if you put the house into an Asset Protection Trust that is also designed to minimize taxes, your beneficiaries would avoid capital gains tax on the increase in value that accrued during your lifetime.   Once you are gone, the house will pass to your child, but now his or her basic “steps up” – the basis is re-set at whatever the fair market value of the house is at the date of your death.  So if the value at your date of death is $450,000, that is now your children’s basis in the house.  If the house is sold for that amount, no capital gains tax will be due.

The savings in money and hassle from setting up this type of trust can exceed the expense and time needed to establish it by many orders of magnitude.  An Elder Law attorney can advise you whether or not such a trust makes sense for you.  More information about the Asset Protection Trust and other Elder Law topics is available on our website.

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