Protecting Assets with Irrevocable Trusts
Originally published in the Dominion Post Senior Post.
As we continue our series on trusts, we will focus on the irrevocable trust that can preserve your financial legacy from the rising cost of long-term care. Unlike the revocable living trust that we discussed in March, the person creating the irrevocable trust (the grantor) differs from the party who will manage the trust (the trustee) and those who will benefit from the trust (the beneficiaries). Many people are wary of creating a trust that they do not manage directly, which is why it is important to pick a trusted person, often a responsible adult child, as your trustee.
While a trust is actually a legal document, it can be helpful to think of the irrevocable trust as a “lockbox” – the grantor puts assets such as their home, bank accounts, etc. in their lockbox. They shut the lid and lock these assets inside and give the key to their trustee. Five years after the date the last asset was put in the lockbox, the assets are protected should the grantor need to apply for Medicaid in a long-term care facility. The grantor cannot receive a distribution directly from this trust during or after the five-year period, as that would disturb the protection built for all assets in the trust, but others, such as family members, may be beneficiaries that are permitted to receive the assets.
Given that the average cost of nursing home care in West Virginia is currently $10,281 per month (MedicaidAnnuity.com), investing in an irrevocable trust can give you peace of mind in the event that you do need care in a facility. Remember, it takes five years to fully achieve the protection of your trust assets, so it is important to plan while you are still healthy. There are strategies to protect assets should you not plan ahead; however, by the time you are in urgent need of nursing home care, asset protection will be much more complex and costly without preplanning.
Although many people say they will never need nursing home care, the reality is that families often cannot manage their loved one’s care in the home requiring the difficult decision to seek care in a facility. Besides, if you really do pass away without ever needing care, assets in the irrevocable trust do not have to go through the probate process at the courthouse, making the transition smoother for your loved ones.
An additional benefit of this type of irrevocable trust is that the trust income is reported by an individual instead of the trust. As a result, this type of trust usually results in a lower income tax burden than other types of irrevocable trusts. Although this type of trust usually does not reduce estate taxes, it usually is not a concern since the current federal estate tax affects fewer than 1% of the wealthiest Americans (MarketWatch.com).
Regardless, you do not need to be a millionaire to take the important steps to start protecting your assets from the cost of long-term care. Whether it’s the sentimental family farm or your hard-earned life savings, an irrevocable trust might be the right fit for you to preserve your legacy for your loved ones. Next month, we’ll talk about Supplemental (or Special) Needs Trusts and how they can provide for your loved ones who might be receiving public benefits.