What is asset protection?

When it comes to nursing homes and Medicaid, you often hear about “asset protection.” It’s a hot topic—who wouldn’t want to protect their assets? But asset protection is complex, and if something goes wrong your finances and your family could be in a lot of trouble.

Protecting an asset means giving up control.

At its core, asset protection means one thing: transferring legal control of your property to another person. It’s called protection because once you give up your legal right to an asset, you can’t be forced to pay it to your creditors—including hospitals, nursing homes, and the state itself. In other words, the asset is protected. Since so many people—about one third of the elderly—end up paying their entire savings to medical creditors for long-term care, finding a way to protect those savings is attractive. Even though it means giving up your own right to use them.

Note: There’s an important exception to protecting your assets by giving them away. You can’t do it to avoid a debt your currently owe. That’s fraud. Asset protection is all about planning ahead.

Asset protection usually involves an irrevocable trust.

So the idea of asset protection is to transfer legal ownership of your property now before you end up having to pay for long-term care later. The simplest way of doing this is to just give your assets to someone else. You might give your property to a trusted family member, who informally agrees to hold onto the money and give it back to you if you need it. In doing this, though, you give up all legal right to the property. The person you give it to could spend it all on a luxurious vacation. They could also be forced to pay it towards their own debts.

For these reasons, an outright gift is risky. But there’s another way to protect your assets while retaining some control: using an irrevocable asset protection trust. An elder law attorney can create a trust to hold your property under your own terms. You get to make the rules for who gets the property, when, and how.

The cornerstone of an asset protection trust is that you and your spouse cannot retain the right to use the property yourselves. But you can retain the right to say who else gets to use the property, and when. These other people (usually your family) are your beneficiaries.

Usually these trusts are designed to prevent the trust property from being used at all until you and your spouse die. The property isn’t just protected, it’s preserved. This is important because you might still need to dissolve the trust and take back the property.

Even an irrevocable trust can be undone.

But isn’t this trust irrevocable? Yes, but there’s still a legal procedure for dissolving it and distributing its assets—you just can’t do it alone. Doing this requires the consent of all beneficiaries of the trust. Those beneficiaries are probably your children or other family members. It’s a cumbersome procedure that should be done with an attorney and only in an emergency, but it can be done.

Why would you need to dissolve the trust and undo your asset protection? Perhaps an emergency depletes your other savings sooner than expected. Or you need to apply for Medicaid within five years of creating the trust.

Asset protection means divestment.

When you put property into an asset protection trust, you are divesting it. That means if you apply for Medicaid within five years, you’ll have to pay a penalty. But you can “cure” the divestment if the property is given back to you. Again, this requires the cooperation of your beneficiaries.

Asset protection always means giving up your legal right to use assets for your own benefit. That means asset protection always creates a divestment for Medicaid. If not done carefully, you could end up unable to pay for the care you need and ineligible for Medicaid. You do not want to be in that situation.

That’s why you need an elder law attorney to create an effective plan for asset protection. Only an attorney can look at your entire situation and ensure you are provided for, no matter what happens.

How do I provide for a disabled family member in my estate plan?

If you have a family member who is disabled, you’ll need to take that into account in your estate planning. It’s a common situation, but it’s important to provide for your disabled beneficiaries in a different way.

Why do I need to plan differently for disabled family members?

There are two main problems with giving property to a disabled family member.

First, it might disqualify them from government benefits. Programs like SSI (Supplemental Security Income) and long-term care Medicaid are based partly on disability and partly on falling below a certain financial threshold. If a disabled person suddenly gets a big lump-sum inheritance, their benefits will end. What happens then? They’ll have to use that inheritance on things the benefits would have paid for until it’s all used up, at which point they’ll have to go through all the red tape of applying again to get their benefits back. It’s a waste of money and a major headache.

Second, they might not be the best person to manage the property. This is often (but not always) true if they have a significant intellectual disability. But severe physical disabilities or chronic pain can also affect the amount of energy a person can put into managing finances, especially if they are also vulnerable to depression. Of course, many people with disabilities are fully capable of managing their own affairs. You’ll have to decide for yourself whether your particular family member needs this kind of help.

Ultimately, the goal of estate planning for a disabled family member is the same as for any other: provide for them in the way that’s best for them. Estate planning is an opportunity to do good! It can make a huge difference in the lives of your loved ones—doubly so if they have a disability.

How should I plan for disabled family members in my estate plan?

If you want to provide for a disabled beneficiary while avoiding the problems mentioned above, you will need to create a trust for them. This trust will hold the property and allow it to be used and managed for them, without them owning it directly. Because they don’t own the money, it doesn’t count against their government benefits. And because it’s in a trust, someone else (the trustee) is in control of how the money is invested and spent.

There are many different kinds of trusts. The most common type of trust for a disabled person is called a Supplemental Needs Trust or Special Needs Trust (SNT for short). These trusts contain the disabled person’s own money and are designed to supplement government benefits. Their primary drawback is that any money remaining in the trust after the disabled person’s death gets paid back to the State. But since you are planning with your money—not your disabled family member’s money—you don’t need to create an SNT with this drawback. (If you don’t plan your estate and your disabled family member receives an inheritance outright, they will have to scramble and jump through legal hoops and pay legal fees to set up their own SNT—if they even know it’s an option.)

Instead, you can create your own trust designed to provide for your disabled family member. There are several ways to do this.

Option 1: Use your will

Your will can create a trust to provide for your family member after you die. You can put the terms of the trust in the will itself (creating what’s called a testamentary trust), or you can simply give your personal representative the power to create an appropriate trust when the time comes.

For example, I include a provision in every will I draft that kicks in whenever a disabled beneficiary is about to receive property. Instead of receiving it directly and facing the problems mentioned above, this provision allows the property to be placed in a trust for that person’s benefit. You never know if a family member who is currently healthy will become disabled in the future. Accidents, injuries, and illnesses happen. That’s why I always include this as an option.

Note: You’ll probably need to hire an attorney to get a will that includes this kind of provision. Do-it-yourself options are often too basic to include planning for disabled beneficiaries.

So one option is to rely on your will. This is often the cheapest and easiest approach to take in the short term—but it will involve more work and incur more costs later on. Because this provision is contained in your will, only property that goes through your probate estate can be put into the trust that will be created. But most of your property is probably non-probate property—life insurance, retirement accounts, anything with a beneficiary designation. If you want that property to go into a special trust for your disabled family member, you’ll have to change beneficiary designations to your estate or testamentary trust. That will force the property to go through probate and end up in the trust, but it also means you’ll have a lengthier and more expensive probate process.

To sum it all up, if you rely on your will to create the trust to provide for your disabled family member, it will be cheaper and easier in the short term, but more expensive and more complicated for your family in the long term.

Pros Cons
* Simple in the short term
* Easy to put in place
* Inexpensive
* Far better than nothing!
* Requires going through probate
* Requires complicated coordination of beneficiary designations
* More work for your family after you die
* More expenses after you die

Option 2: Create a separate trust now

Rather than waiting until you die and relying on your will, you can set up a trust for your disabled family member right now. This gives you full control and the reassurance that everything is taken care of.

This separate trust will provide that the trust property be used only to supplement any government benefits or other sources of income for your beneficiary. Your beneficiary won’t have any ability to demand or control the trust property or how it is spent—somebody else, the trustee, will make all final decisions. Who that trustee should be is the most important decision you’ll have to make.

You can serve as the trustee while you’re alive. Other family members, especially ones who are reliable and organized, might naturally serve as trustees. Finally, you can have a bank or non-profit serve as trustee (in which case they’ll be paid from the trust property).

Even though you’ll be creating the trust now, you don’t have to put your property into it (“fund” it) until after you die. That’s up to you. You might put property into it immediately if you:

  1. Want your disabled family member to be able to use the trust right away;
  2. Choose to have a bank or non-profit serve as trustee; and
  3. Want to “set it and forget it,” letting the professional trustee take care of distributions, investment decisions, and administrative tasks.

The more common approach is to set up the trust but wait to fund it. In that case, the trust is ready and waiting to receive property after you die. Because it already exists, no probate is required to set it up and you can name it as a beneficiary of your life insurance and retirement accounts. Because it isn’t currently funded, there are no ongoing costs or administrative tasks to maintain it (apart from having an attorney review it every once in a while in case the law has changed).

Pros Cons
* You have full control over terms of the trust and who is in charge
* Reassurance that everything is taken care of
* Option to fund immediately and have managed professionally
* More legal fees up front to set up
* Requires coordination of beneficiary designations to avoid probate
* If unfunded, little immediate benefit

Option 3: Create a living trust for yourself that turns into a trust for your disabled family member after you die

This option has the greatest flexibility and immediate benefit. It’s sort of a combination of Options 1 and 2. A living trust is a common way to avoid probate and make estate administration simpler for your family after you die, but it can also, just like a will, create another trust for your disabled family member. It can provide for your other beneficiaries, too, and simplify your estate administration by bringing all your property under one roof. So you get to avoid the expense and complication of probate, make things simpler for your family, and maintain a lot of flexibility while you’re living.

The main drawback of this option is that it is more expensive than a will-based plan (though less expensive than Option 2) and requires some retitling of accounts and changing of beneficiary designations after you create the living trust.

Pros Cons
* Less expensive than Option 2
* You get all the advantages of a living trust for yourself
* Completely avoids probate
* Consolidates all your estate planning in one document
* Allows simpler and faster estate administration after you die
* You have full control over terms of the trust; custom
* More expensive than Option 1
* More work up front to set up
* No option to have a professional trustee manage while you’re alive

A final option: Rely on an informal plan

Last of all, you might have the idea of leaving everything to a healthy family member, trusting him or her to use the money for the disabled family member as needed. For example, a client who has one healthy adult daughter and one disabled adult son might leave everything to the daughter, knowing she will take care of her sibling.

This is an informal arrangement. The daughter legally owns the property and can do whatever she wants with it. It’s vulnerable to her creditors (imagine a lawsuit) and to the property shenanigans of marriage and divorce. It’s also affected by the daughter’s own estate planning—or lack thereof. And then who provides for the disabled son after the daughter’s death?

These risks are hard to anticipate or control, even if you think they aren’t likely to happen to your own family. Even if everything goes well, it’s likely some of the money meant for your disabled family member will be lost, intermingled, or invested inappropriately.

An informal arrangement carries the most risk that your money will ultimately not provide for your disabled family member as planned, for one reason or another. But an informal arrangement certainly can work. If you are comfortable taking those risks, have a family member who is not only trustworthy but also reliable and organized, and can’t afford more formal estate planning, an informal arrangement might work for you. If you can afford even simple estate planning, I think it’s worth it to eliminate the risks of an informal plan.

Pros Cons
* Cheapest, easiest option
* Flexible; family have complete control because they own the money
* Greatest risk that money will be taken or wasted
* Family who receives money has to figure out everything for themselves; no direction
* Not that much cheaper than Option 1