 Personal Finance PowerPoint Presentation. Asset Protection Trust for Seniors. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we use the adage of measure twice, cut once, put in a formal process in place, looking something like setting the goals, develop a plan to reach the goals, put the plan in action, review the results, repeat the process periodically. Most of this information can be found at Investopedia. Asset Protection Trusts Help for Seniors, which you can find online. Take a look at the references, resources, continue your research from there. This is by Greg Dafferti, updated September 30th, 2021. In prior presentations, we've been talking about insurance in general. We moved to medical insurance, and now we're thinking about the long-term care in general and different strategies that might be used to help seniors. So Asset Protection Trusts Help for Seniors. And Asset Protection Trusts can help seniors in need of constant nursing care, pay the substantial costs of assisted living or skilled nursing facilities and at-home help. So in a situation where we're gonna need extended care for a lot of the time, that's gonna be quite expensive, so there can be certain strategies possibly for helping out at that point. Average daily nursing home costs exceed $247 and can be significantly higher in certain metropolitan areas, according to a 2019 Genworth survey. Medicare, the federal healthcare program for seniors age 65 and above, only covers nursing home expenses when one enters a facility for short-term rehabilitation. So notice when you're talking about the Medicare, then you're talking about something that is usually kind of similar to like health insurance. So it's not really designed for the long-term care, people that need constant help for forever, for some point in time, for a long-term time, it's there to help for the rehabilitation process in the event that you have kind of, hopefully a more short-term but possibly serious kind of problem that suddenly happened and could have significant costs related to that, similar with the health insurance. So we got the Medicaid, a joint federal and state program can cover the balance, but in order to qualify for the latter, a person's total countable assets, including cash and bank accounts plus investments such as mutual funds, stock and bonds can't exceed $2,000 to $3,000 depending on the state. So the Medicaid, as we've seen in prior presentations, is typically something that we think of as a safety net program. So you wanna get an idea of the differences in these federal programs, they can be kind of confusing. Was it set up like social security, Medicare, Medicaid, are they set up as something that are gonna be benefits to everyone that you can kind of rely on in retirement kind of thing or are they benefits that are given as a safety net kind of program to help people whose income is below a certain threshold? And so the Medicaid is typically kind of more designed for the latter. So if you have a significant amount of assets, you might say, look, I need to plan for this in some other way possibly, you might try to get some long-term care insurance or something like that. Or if you're in the situation that you're qualifying for or you want to see if you can get the qualification for the Medicaid, then you've gotta take into consideration these thresholds and you might have some strategies available to help you with that. So people often exhaust their life savings before the Medicaid kicks in, making it difficult to leave an inheritance or to provide the surviving dependence. So in other words, it's kind of a shame to just spend the money that you had in order to qualify for the Medicaid instead of being able to possibly pass it along to dependence or something like that. By shifting assets into an irrevocable trust, individuals may qualify for Medicaid while preserving a portion of their wealth for their loved ones. So again, if you don't qualify, you're saying, okay, Medicaid's my only option. I can't really purchase a long-term care or something like that. At some point in time, you might say, okay, how can I preserve some of the wealth that I have but still get my asset level and income level or whatever down to the point that's qualifying for the Medicaid. And then you talk to lawyers about this kind of thing and you possibly could set up a trust. The trust is like a separate entity, kind of like a corporation and that it can own things and whatnot. And if you set the trust up properly, then maybe you can have some of your assets there that wouldn't be countable when you're doing the Medicaid calculation to see if you would qualify for the program because your assets need to be below a certain threshold. So how does trust help protect a senior's assets? So the two basic kinds of trusts are the revocable and irrevocable as the name implies revocable trust can be revoked. So Medicaid considers assets, incest, trust to be still owned by the person who established it. So you can imagine kind of the back and forth that goes back here. So this is a similar kind of thing that we see if you see like estate taxes or death taxes, you might hear them called. If someone's gonna, if the government's gonna tax you when you die, then you might be saying, okay, well, what's the plan? What do I wanna do? I wanna give my money away before I die so the government doesn't pick my pocket once I'm dead on the floor. So you can give the money away. You might try to set up a trust and say it's not yours. Now, when you give the money and you got a similar situation here, right? You're saying, okay, I have to have less money. So what I'd like to do is give my money away to give it to someone else or put it in a trust. The problem with giving the money away is one, they might, it might still not count because they might then say, the government's gonna come back and say, well, let me go a look back period. Did you give that money away just to avoid giving me the money or to qualify for the Medicare or the Medicaid? Then that could be a problem. So you can see this back and forth between the policies and people trying to qualify. So then the other thing is, well, what if I give my money away then I have no control over it. I don't quite trust my siblings possibly even use my money to take care of me or something like that. Well, then you might try to put it into a trust. So you're saying the trust is kind of like a corporation. It's its own entity. It's separate from me. I don't own the money. The trust owns the money. But then of course you come into the problem of do you still have control over the money? Can you revoke the trust and get the money back? Well, if that's the case, then although the trust is a legal entity, it doesn't look like it actually owns the money because you still have control over it. So this control issue often is the case when you have these kind of strategies in place. But this is the road that we're going down. So, and if that amount exceeds the countable assets limit, they won't qualify for assistance. So on the other hand, an irrevocable trust. So the irrevocable trust is the one that they're gonna say, okay, maybe that you don't have control over the money. So maybe then we're gonna say it qualifies. So on the other hand, an irrevocable trust effectively lets a person transfer control of their money to a trustee allowing them to qualify for Medicaid. So note that there is a lag time due to the Medicaid's current five year look back period. So then, so they put in this look back period to try to determine if you made transfers of money to something or someone that would disqualify just to qualify for the program. And so, again, this game goes on, goes back and forth. Any money transfer into a trust five years before a person applies for the Medicaid may delay the eligibility for benefits. The length of delay known as the penalty period is determined by dividing the value of the transferred funds by the Medicaid's regional rate for nursing home care in a given region. So if they go to the look back period and they say, hey, you transferred money that you shouldn't have transferred or something because you're trying to transfer it just to qualify, then they might calculate some kind of penalty. So for example, in an area with a regional rate of $10,000 a month, an individual who transfers 10 100,000 into a trust before entering a nursing home would be eligible for a total of 10 months of Medicaid assistance. So 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 the 100,000 into the trust. Alternatively, if that individual transfers the assets more than five years earlier, they could immediately qualify for aid. So tax advantage of a trust. Trusts also offer tax advantages. Assets in a trust benefit from a step up in basis which can mean substantial tax savings for the heirs. So step up in basis meaning like when you sell the assets, typically you have to take the sales price minus the adjusted cost or basis they call that. And so you would like to have a higher basis or cost because that gain is what you might have to pay taxes on. So if you can have a step up or an increase in the basis that's typically good because then when you sell the property, you're gonna have less of a gain and possibly pay less taxes. So by contrast, assets that are simply given away during the owner's lifetime typically carry the original cost basis. So in other words, if you were to say, okay, I'm gonna try to qualify for Medicaid by just giving the money to say my son or my relatives or my daughters and whatnot. Well, then it's usually a gift and the gift usually carries with it the original person's basis, which if you're talking like stocks or something like that is usually lower which means when they sell it, they'll have a higher gain and possibly have to pay taxes on it. So if you were able to pass on your wealth to in the form of stocks and bonds and stuff to somebody else and have them step up the basis to the current prices, meaning the current fair market value, then when they sell it, they might not have to recognize that big gain. So that's part of the whole tax and estate planning considerations. So consider the following example. Let's assume that the shares of stock costing $5,000 when originally purchased are worth $10,000 when the beneficiary of a trust inherits them. In this case, the stock would be a basis of $10,000. So had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. So later, if the shares were sold for $12,000, the person who inherited them from a trust would owe tax on $2,000 because they had that increased basis. While someone who was given the shares would owe a tax on the $7,000 because they would have had the original owner's basis of the $5,000. $5,000 was it and they sold it for $12,000. So that's the thing. So simply put, the tax consequences on assets received from a trust are greatly reduced. So 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 reasons, it's essential to appoint a reliable person as trustee. So in other words, you're trying to say, okay, I'm gonna put money into, I can give money to the actual person as long as it's possibly before the look back period. I'm trying to do it before the look back period so that when they look back, I don't get in trouble for it, but I'd rather put it into a trust because if I put it into the trust, then I don't really own it at that point in time but I might be able to pass it on at tax benefits and I then have to appoint the trustee who is tasked with the purposes of being able to do what the trust is designed to do with the money, which maybe they can set it up so that they could draw the money out to take care of whatever needs are gonna be taken care of. So that puts, no matter how you cut it, you're losing kind of control of the money generally. That's kind of the general idea and therefore you have to trust the person who you're given the money to, in this case, the trust, which would be the person who is gonna be the trustee and trying to do what needs to be done according to the trust terms. They're gonna be the job of the trustee. So what's 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 that of their heirs. So if you're depending on the Medicaid, then you still would like to look at it kind of early so that you could possibly structure your financial affairs in such a way that it would be most beneficial. But again, if you have a substantial amount of revenue and assets and it's a fairly early on, you might look for other strategies as well as other types of insurance policies or for example, that might be more flexible than the Medicaid, but if you can't put those together then the Medicaid might be available. You'd still like to do it early and then talk to possibly an attorney to structure your affairs in such a way to optimize the benefits.