There are many different types of irrevocable trusts. The type use will depend on what you want to accomplish. What follows is a discription of some of the most common types of irrevocable trusts set up for asset protection.

Long-Term Care Asset Protection Trusts

A popular long-term care planning option used by many elder law attorneys is the Medicaid (or VA) Asset Protection Trust (MAPT or VAPT). These trusts are designed to maintain as much control in the Trustmaker as possible, while still protecting assets from the cost of long-term care. MAPT’s and VAPT’s can be used to prepare for the risk of a future long-term care crisis (preplanning) or to protect assets when you are already in care (crisis planning). With preplanning we are using the trust to begin the five-year Medicaid clock (and for VA benefits, the three-year clock) while you are still healthy. When you are already in a long-term care crisis, we use these trusts to protect the home and other assets when applying for VA Pension benefits and sometimes as part of a Medicaid eligibility plan.

Many people think that an irrevocable trust means they lose all control of their assets. However, with these types of trusts, we are only giving away those pieces of control that we have to give way in order to accomplish the purposes of the trust. For example, the Trustmaker may sometimes be able to be the Trustee, retain an income interest, and have the right to change who gets the assets after his or her death. These trusts also contain sophisticated income and capital gains tax provisions that allow the Trustmaker to retain the favorable tax treatment they enjoy as an individual while still protecting their assets.

We have drafted hundreds of these types of trusts over the years. This is one of our major areas of expertise. If you are interested, call today to see if this type of planning is right for you.

Third Party Supplemental Needs Trusts

Many people with disabled children believe the only way they can provide for them is to disinherit them and give their share to another child to take care of it for them. However, this creates many problems. What if the non-disabled child also becomes disabled or dies? What if the non-disabled child goes through a divorce, does not take good care of the funds, or gets sued by a creditor? What if the disabled child dies, where do the funds go? In all these situations, there may be unpleasant surprises or consequences.

There is a better solution. It is called a Third Party Supplemental Needs Trust. These trusts are created by a parent (or other third party) on behalf of a disabled child (or other beneficiary). These trusts manage the disabled child’s funds while not interfering with their benefits. Supplemental Needs Trusts are wonderful tools that allow a parent to leave behind a structure to continue the care they are no longer able to give to their disabled child. These trusts do not require anything to be paid back to the state after the disabled child’s death, so all funds in the trust go as directed by the parent. Parker McCarter

Self-Settled Special Needs Trusts

Self-Settled Special Needs Trusts are used to protect the assets of a disabled person who is under the age of 65. Imagine a situation in which you or a loved one have been seriously injured in a car accident because of someone else’s negligence and is about to receive a financial settlement. However, you or your loved one are on Medicaid or SSI and are afraid to lose those benefits.

The Self Settled Special Needs Trust (SNT) may be the solution. Such a trust can receive the funds and use them to supplement and improve the quality of your or your loved one's life while still maintaining Medicaid, SSI, and housing benefits. However, after death this type of trust must repay the state for medical expenses they have incurred. This is called a pay-back provision. Even with that requirement, such trusts are a powerful solution for many people.

Estate Tax Planning Trusts

A number of irrevocable trusts are utilized to safeguard assets from estate taxes. Two common trusts used for estate tax planning are the Irrevocable Life Insurance Trust (ILIT) and the Intentionally Defective Grantor Trust (IDGT).

ILITs are structured to hold a life insurance policy, ensuring that when the policy’s proceeds are paid to the trust, they do not form part of the Trustmaker’s estate. These proceeds can then be employed for various purposes, such as counterbalancing estate taxes or balancing inheritances when a family business, a farm, or another substantial asset is being passed on to one of the beneficiaries. Annually, contributions are made to the trust as tax-exempt gifts on behalf of your beneficiaries to cover the life insurance premiums.

On the other hand, IDGTs are trusts that permit you to utilize your annual exclusion gifts for the benefit of children, grandchildren, and other potential beneficiaries without actually transferring the assets to them. These trusts are considered “defective” for income tax purposes, meaning that the IRS disregards the trust for income tax purposes. Consequently, all taxes due on the trust’s assets can be paid by the Trustmaker from their personal funds. This enables the Trustmaker to extract even more assets from their estate while the trust assets appreciate without tax reductions. IDGTs also “freeze” your assets’ value for estate tax purposes since any asset growth after the transfer to the trust is outside your estate.

As evident, all these matters necessitate an attorney with the proficiency and expertise to manage intricate legal, tax, and estate planning scenarios. The ElderCare Law Firm is eager to guide you through the complex legal terrain of asset protection trusts. Reach out to us to discover more about our asset protection trust services.