The term “asset protection” is often applied to potential vulnerability to legal actions. This being stated, in the realm of elder law and estate planning, there are other types of threats to your assets. We will take a look at two of them in this blog post.
Nursing Home Asset Protection
Nursing home asset protection is something that everyone should take into consideration. The vast majority of people will qualify for Medicare coverage when they reach the age of 65. If you have worked for at least 10 years, even if it was a reasonably significant amount of part-time work, you will be sufficiently vested in the program.
That is the good news, but the bad news is that Medicare does not pay for long-term care. The majority of senior citizens will need help with their activities of daily living at some point in time, and many of them will reside in nursing homes. We practice law here in the greater Detroit area. You can expect to pay over $120,000 a year for a private room in a nursing home in our area right now, and costs have been rising.
Medicaid will pay for long-term care if you can obtain eligibility, but it is only available to people with very limited resources. To qualify for Medicaid, you could use an irrevocable Medicaid asset protection trust. You would not be able to access the principal, but you would be able to use earnings that assets in the trust produce until and unless you apply for Medicaid.
There is another trust that can be used for Medicaid planning purposes called a Miller trust or qualified income trust. In addition to asset limits, there are income limits, and you could direct excess income into this type of trust to create a financial profile that will lead to eligibility for Medicaid coverage.
Estate Tax Asset Protection
The other asset protection trust that we will look at here is utilized by high net worth individuals. We have a federal estate tax in our country that can significantly erode your legacy, because it carries a 40% maximum rate. That’s the bad news. But the good news is that there is a federal estate tax credit or exclusion that can be utilized transfer a certain amount free of taxation.
This exclusion is $11.4 million in 2019. We are well aware of the fact that a very small percentage of people face exposure, but we like to cover all of our bases.
There are a number of different estate tax asset protection trusts that can be used to ease the burden. One of them is the qualified personal residence trust, which can facilitate a transfer of your home to a beneficiary at a significant tax discount.
The way that it works is you convey your house into the trust, and you name a beneficiary that will assume ownership of the property after the term of the trust expires. This interim is referred to as the “retained income period.” You continue to live in the home as usual during this period of time.
Though you would remove the home from your estate for tax purposes when you convey it into the trust, the act of passing it along to a beneficiary would be looked at as a taxable gift. There is a gift tax in place that is unified with the estate tax, and it carries the same rate. The exclusion applies to the value of your estate and any large gifts that you give while you are living.
Getting back to the retained income period, let’s say that you choose a 10 year term during which you remain in the home. When the IRS is calculating the amount of the taxable gift, they will take this into consideration, because no buyer would pay full market value for a home they could not occupied for a decade. As a result, when the transfer takes place, the taxable value of the gift will be considerably less than the actual value of the home.
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If you would like to obtain more information about trusts and other estate planning matters, attend one of our upcoming seminars. They are free, and you can visit our seminar schedule page to reserve your seat.