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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 . 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).

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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 (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.

before asset protection
after asset protection

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.


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.