Asset Protection Trusts: Help for Older Adults

An asset-protection trust can help older adults in need of constant nursing care pay the substantial costs of assisted living or skilled nursing facilities and at-home help. Average daily nursing home costs can exceed $320 and can be significantly higher in certain metropolitan areas, according to a 2023 Genworth survey.

Medicare, the federal health care program for adults 65 and older, only covers nursing home expenses when you enter a facility for short-term rehabilitation. Medicaid, a joint federal and state program, can cover the balance. But in order to qualify for the latter, your total countable assets—including cash in bank accounts and investments such as mutual funds, stocks, and bonds—can’t exceed $2,000 to $3,000 or sometimes more, depending on the state.

People often exhaust their life savings before Medicaid kicks in, making it difficult to leave an inheritance or to provide for surviving dependents. By shifting assets into an irrevocable trust, individuals may qualify for Medicaid while preserving a portion of their wealth for their loved ones.

How Do Trusts Help Protect an Older Adult’s Assets?

The two basic kinds of trusts are revocable and irrevocable. As the name implies, revocable trusts can be revoked. Medicaid considers assets in such a trust to be still owned by the person who established it. And if that amount exceeds the countable assets limit, they won’t qualify for assistance.

On the other hand, an irrevocable trust effectively lets you transfer control of your money to a trustee, allowing you to qualify for Medicaid. Note that there is a lag time, due to Medicaid’s current five-year “look-back” period. Any money transferred into a trust five years before you apply for Medicaid may delay the eligibility for benefits. The length of the delay, known as the “penalty period,” is determined by dividing the value of the transferred funds by Medicaid’s “regional rate” for nursing home care in a given region.

For example, in an area with a regional rate of $10,000 a month, an individual who transfers $100,000 into a trust before entering a nursing home would be ineligible for a total of 10 months of Medicaid assistance. In this case, someone (typically a family member) would have to pay the nursing home out of pocket before Medicaid began covering the bills, which effectively wipes out any advantage of putting $100,000 into the trust. But if that individual transferred the assets more than five years earlier, they could immediately qualify for aid.

Tax Advantages of a Trust

Trusts also offer tax advantages. Assets in a trust generally benefit from a step-up in basis, which can mean substantial tax savings for the heirs. By contrast, assets that are simply given away during the owner’s lifetime typically carry the original cost basis.

Consider the following example. Let’s assume that shares of stock costing $5,000 when originally purchased are worth $10,000 when the beneficiary of a trust inherits them. In this case, that stock would have a basis of $10,000. Had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. Later, if the shares were sold for $12,000, the person who inherited them from a trust would owe tax on a $2,000 gain, while someone who was given the shares would owe tax on a gain of $7,000. Simply put, the tax consequences on assets received from a trust are greatly reduced.

The Importance of Choosing the Right Trustee

A properly-drawn trust will not only preserve an individual’s assets but also give trustees the discretion to distribute money to beneficiaries, who in turn can spend it for the older person’s benefit. For this reason, it’s essential to appoint a reliable person as trustee.

You can also name a bank as either the trustee or a co-trustee.

The Bottom Line

People who need financial assistance from Medicaid don’t necessarily have to exhaust their life savings in order to qualify for aid. A properly-drawn irrevocable trust can protect at least a portion of their assets, both for their own benefit and for that of their heirs.