Using a trust to protect assets from long-term care costs

Let’s start off by reviewing trusts in general.

Simply put, a trust is a legal document, words on paper, drafted by an attorney. When signed by the maker of the trust, a legal entity is formed. That entity is managed by a trustee according to the terms of the trust.

Typically, a trust is funded with assets during the trustmaker’s lifetime. This ensures the trust works as intended.

If you Google search the term “trust,” you’ll quickly be overwhelmed by millions of results. That’s because there are many different types of trusts, all of which serve different purposes.

In the context of long-term care planning, there are two trusts we use regularly, but they are often confused with one another.

A Miller Trust, also known as a qualified income trust, is not the magic tool that protects assets from long-term care costs. Rather, it is used strictly to achieve income eligibility for long-term care Medicaid benefits.

Delaware, for instance, has an “income cap” of approximately $2,000 per month. This means that if a person seeking eligibility for long-term care Medicaid has income such as Social Security or pension benefits that exceeds $2,000 per month, she is not eligible without creating and funding a Miller Trust.

Once signed, the Miller Trust is used to open a bank account in the trust’s name. All of the applicant’s income must be deposited into this new bank account each month. From there, the trustee uses that income according to the Medicaid regulations.

Assets, like cash or real estate, should never be transferred to a Miller Trust. Income is all that ever goes in to this type of trust. For this reason, a Miller Trust is not an asset-protection planning tool. It is only ever used at the time of application for long-term care Medicaid benefits to satisfy the income cap rules.

An irrevocable asset-protection trust, on the other hand, is a highly effective tool to shelter assets from the costs of long-term care. If you’re thinking about deeding your house to your kids, consider this trust instead.

Many seniors want to give assets away now, in order to protect those assets in case long-term care, which can cost more than $10,000 per month, is ever needed in the future. They figure that if those assets are no longer in their names, then they won’t be available to pay for care and thus will be protected.

Giving assets outright to other individuals, though, can be very risky. What if those individuals get divorced, file for bankruptcy or need long-term care themselves? Those assets, now in someone else’s name, are subject to those risks.

The better practice is to use an irrevocable asset-protection trust. Once signed, assets can be transferred to it. Five years later, those assets are protected and are completely off the table should long-term care be needed in the future. Real property such as your residence, beach house or even rental property is a great asset to transfer to this type of trust. Many families are interested in protecting the equity in their real property, if nothing else.

Other assets, like cash accounts or life insurance policies with cash value, can be transferred to an asset-protection trust too.

We cover the mechanics of an asset-protection trust in other articles. What’s important to note here is that a Miller Trust has a purpose and a place, but an asset-protection trust is the primary tool that effectively protects assets from the future costs of long-term care. It’s imperative that anyone interested in creating a trust of any kind receive guidance from a specialized elder law firm. Misusing these legal tools can result in compromising benefits and spending more on care than necessary.