In a previous article I discussed how Trusts work. As I mentioned in that article, while most of us have heard of a “trust agreement,” few people truly understand how a trust works. The result of this lack of understanding is, most people are confused by trusts and avoid using trusts to accomplish their goals. But using a trust to transfer assets to family members or loved ones could have several distinct advantages over outright transfers, or gifts, to these individuals.
For purposes of example, I will discuss the use of an irrevocable trust in the context of Medicaid planning. Medicaid is the largest payor of long-term care, providing financial assistance for care in the community, assisted living residences, and nursing homes. In fact, Medicaid pays for approximately 50% of all long-term care being provided in the United States.
Yet, as those that read my article on a regular basis know, Medicaid is a welfare program. So, in order to qualify, a person must be “needy,” meaning that they must have very little money in their name.
Having very little money doesn’t present an insurmountable problem for most people receiving long-term care services. The average nursing home in Monmouth County costs approximately $7,000 a month, or $84,000 a year, so poverty is just around the corner for those unfortunate enough to require long-term care services.
One of the cornerstones of Medicaid planning is gifting, giving your assets to your family members. The question is, is it better to give a child cash outright, simply handing the money over to the child, or is it better to place the assets in a trust, of which the child is the trustee?
If a mother were to gift money to her son, the money would be the son’s asset to do with it what he wished. The money would be subject to any credit problems the son might have. In other words, if the son were sued, the money that the mother gave to the son would be available to pay the son’s creditors. If the son were married and were to get divorced from his wife, the money that the mother gifted to the son could become embroiled in the divorce litigation. If the son had a child in college who was receiving financial aid, the money that the mother gifted to the son could disrupt the grandchild’s receipt of financial aid. After all, the money that the mother gifted to the son is now the son’s money.
If the mother were to gift the money into a trust, of which the son were the trustee, the problems outlined above would not exist. The money in the trust would not be subject to the son’s credit problems. Trusts can have what are called “spendthrift provisions” drafted into them. A spendthrift provision says, essentially, that the money in the trust will not be subject to a beneficiary’s creditors while the money is in the trust. What this means from a practical standpoint is that the son’s creditors could not attach the mother’s money being held in the trust to satisfy the son’s debts.
The same is true if the son were to get divorced. Because the assets are unavailable to the son and because the trust has a spendthrift provision, the money in the trust will not be an issue in his divorce proceeding.
Finally, because the money is unavailable to the son, the money will not disturb the grandchild’s receipt of financial aid. Once again, the money is unavailable to satisfy the debts of the son and the son’s family, so it is unavailable to pay the grandchild’s college. Because the money is unavailable, it is not counted in determining whether or not the grandchild is entitled to receive financial aid.