How to think about asset protection

There’s a common misconception about asset protection: Protecting my assets saves me money right away. In fact, it protects the assets immediately but only saves you money in the long run.

Here’s what I mean. Remember that asset protection usually means transferring your property to an irrevocable trust and giving up your right to use it. This ensures the property won’t be spent on your own long-term care or recovered by the State after you die—your family will get to keep it. But you don’t transfer everything you own. Whatever isn’t transferred must still be spent on long-term care.

Imagine a single elderly woman who needs nursing home care and has $200,000 in a bank account. If nothing changes, that bank account will be going down by (let’s say) $10,000 per month until it’s all gone (a high estimate, but it makes the numbers easier to comprehend). Medicaid only pays for the care after all $200,000 is spent, which takes 20 months.

What if, in the same situation, $100,000 is in an asset protection trust? That means Medicaid pays for the care after only $100,000 is spent, which takes 10 months. That looks like a good $100,000 saved.

But whether that $100,000 is actually saved or not depends on how long she lives and continues to need care. If she passes away the day after creating the trust, no money has actually been saved; the family gets $200,000, whether half of it is in an asset protection trust or not. If she passes away after 10 months and spending $100,000 on long-term care, again no money has actually been saved; the family gets the remaining $100,000 whether it’s in a trust or not. It’s after this point that money starts being saved (the green zone in the chart below).

You can see this in the scenario where she passes away after 15 months:

• Scenario 1: She did no asset protection. She will have spent $150,000, leaving $50,000 for the family.
• Scenario 2: She protected $100,000 in an asset protection trust. She will have spent $100,000 and then qualified for Medicaid, leaving $100,000 in the asset protection trust for the family.
• The difference between Scenario 1 and Scenario 2 is $50,000. That is the money actually saved by asset protection.

Note that the full $100,000 isn’t actually saved until she lives and needs long-term care for a full 20 months. This why it’s best to think of asset protection as a cap on liability, rather than an instant savings coupon.

It’s a bit like health insurance with a deductible. Before asset protection, this woman had a “deductible” of $200,000 before her de facto long-term care insurance (Medicaid) kicked in; after asset protection, this woman had a “deductible” of $100,000. In either case, that deductible must be spent first, and there’s a decent chance she will never need to spend that much.

Why am I explaining this so carefully? It’s important to making an informed decision. Is it worth the work and legal fees to protect assets? Sometimes asset protection is marketed as if it’s a no-brainer: Pay me $5,000 and you’ll save $100,000. The reality is not so simple.

If you’re wondering about asset protection, talk to an elder law attorney to understand how much you can protect. Then think of the amount that isn’t protected. What are the chances you’ll have to burn through it all paying a nursing home? How long would that take?

If you doubt that will ever happen, asset protection might not accomplish much. But if you’re worried about losing all that money and then some, asset protection may be right for you. It will give you the assurance that this much, and no more, will be lost. It will put a cap on the cost of long-term care.