Ep 34 Mastering Elder Law: The Role of Irrevocable Trusts in Asset Protection and Medicaid Planning

Embark on a journey through the complex landscape of Elder Law with me, Todd Whatley, as your guide. Together we'll uncover the benefits and drawbacks of Irrevocable Trusts, a critical tool in asset protection. This episode promises to illuminate the path for safeguarding your clients' assets from Medicaid, while carefully considering the irreversible sacrifices that come with it. You'll gain insights into the delicate balance of asset protection, especially when handling family treasures like farms, and learn when to implement these trusts or when to proceed with caution.

As we navigate the nuanced strategies of estate planning, I'll share my perspective on why long-term care insurance is not just an option, but a cornerstone in protecting assets during the trust's look-back period. In addition, I'll debunk some dangerous myths surrounding asset protection tactics – think twice before you advise a client to pursue divorce as a strategy! For those eager to deepen their expertise in Elder Law, I extend an invitation to join my coaching program, where we can grow and learn from one another. Tune in for a masterclass in the art of Elder Law and take a giant leap towards becoming a trusted advisor in this rewarding field.

Check out our new website www.TheElderLawCoach.com.

Transcript

Speaker 1: 0:02

You're tuning in to the Elder Law Coach podcast, the definitive resource for attorneys delving into the world of Elder Law, with your host, todd Watley, a certified Elder Law attorney, past president of the National Elder Law Foundation and renowned coach with a quarter-century of specialized experience. Whether you're an established attorney looking to refine your expertise or an emerging lawyer seeking a successful foray into Elder Law, this is your masterclass. Now let's get started with the luminary in the field. Here's Todd Watley.

Speaker 2: 0:37

That's right. This is the Elder Law Coach podcast and, as always, I'm super happy that you are listening and thank you so much for downloading. This thing seems to be growing. As soon as I put one up, I'm getting quite a few downloads, and that always makes me happy, and I would love to hear from you. So if you do have ideas, suggestions, comments, complaints, gripes, hey, I'm open. Please email me at Todd at theoddlalkoachcom. I would love to hear from you just to know if I'm doing it right or not, and definitely, if there is a topic that you want me to talk about, I would love to hear that.

Speaker 2: 1:22

So, as with most of my podcasts, they come from things that happen. I am still a practicing attorney. I see things all the time, and a lot of times the podcasts are created from situations that I see and have to deal with, and so today's thing is I was honestly surprised that I had not done a podcast on it, because this is one of the most major things we do as elder law attorneys, and I don't do a lot of them, and you'll see why once you get to the end of this podcast. But the Irrevocable or Asset Protection Trust is a tool that we can use and I see it misused so many times. You know, a lot of times, particularly non-elder law attorneys, if they're dealing with someone with some assets worried about nursing home care, it's like, oh, we do an Irrevocable Trust, asset Protection Trust that'll protect the assets. Well, yeah, but you can cause a whole lot of problems, and so today's episode I want to go through and walk through this process with you of number one what it is, give you a quick definition of the Asset Protection Trust that is commonly used when it's not appropriate and then when it is appropriate, and hopefully you can learn from this and not put some people in some bad situations or not miss out when it could be done for some folks that truly do need it.

Speaker 2: 3:06

So let's start out with the when. Well, let's begin with what it is, okay. Number one the Asset Protection Trust is typically the Irrevocable Trust that we create when someone is wanting to protect their assets from Medicaid. You do understand that when there is a transfer and that's what this is we're transferring the assets into a trust that you definitely no longer benefit from, and typically I would recommend that you no longer control when you do have control. There is some argument there by the state that you could control the trust so that it would benefit yourself. And there are some people who will do an income only trust, meaning that only the income is countable, but it is countable all the way up until the end. So typically when I do an irrevocable trust, it is a trust that my client no longer controls, nor do they benefit from, and if you'll make it that clear and that concise, you can make sure that the state will not come back after it. So that's number one. It's a trust that can hold assets that will be protected from Medicaid but since it is a transfer, you are losing control and benefit of that asset there.

Speaker 2: 4:34

It is subject to the five-year look back and therefore Will cause a problem if you do it inappropriately. So let's talk about the Cases where it's not appropriate. It is not appropriate for low asset cases. Yes, someone may come to you and say, hey, I've got a home and some land and a little bit of money and I want to protect it from Medicaid. Well, I understand that, but not having the assets to get you through that five-year look back is a problem. And Even if this person isn't really good health and you're almost absolutely sure they can make it. I am still very cautious about putting someone into an Asset protection trust if we don't have the money to get us through those five years and and the rules with returning a gift are, you know, basically thwarted with this trust and I'm in Arkansas, as you probably know, and they are very particular that, yes, you can return a gift and the portion that you return will reduce the gift amount, but it is absolutely mandatory that the person who would receive the gift has has to return the gift and if someone else returns the gift to replace that gift, that is not Considered a return of the gift and therefore does not reduce the penalty.

Speaker 2: 6:03

So if you put an asset into this irrevocable trust that Cannot give assets back to the grand tour they are not the beneficiary of this trust you would be violating the terms of the trust. If you gave assets directly back to the grand tour In a state like mine, you would not reduce the gift. So therefore, once you put it in there, you're stuck. Okay, you can't undo it.

Speaker 2: 6:30

And the way that I do this and it's a huge selling point is people think when you mention putting your assets into an irrevocable trust, they think that you're doing it, that you're putting all of their assets in there and definitely you're not you really do need to keep out enough money to pay for five years. And so, basically, just take your average nursing home cost today and I know this isn't accurate, but chances are they're not going into the nursing home the day after you do this, but run the numbers as if they did today's cost minus their income Means the difference they would have to pay out of assets to get them into the nursing home. Multiply that by 60 and so therefore, that's the lump sum that someone would need to get them through a five-year look back. Well, that's going to be a few hundred thousand dollars. So therefore you don't put a few hundred thousand dollars in there, which means you have to have Many more than a few thousand dollars to put into the trust to make it worthwhile. So that's why one of the you know cases where this is not appropriate is the low asset cases, and when I say low assets, as a very general rule not counting the house we're talking about half a million dollars, because you're going to need some money to pay for the nursing home Through those five years and your client really doesn't want to be broke for the rest of their life. They need some money so they can go do things. They don't have to go beg the kids for money. So generally I will keep out two or three hundred thousand dollars at least so that the family or the couple your client has money to survive. And if they did have to go into the nursing home for the next five years they would have money To pay it. Okay Now, obviously that there are exceptions to this, and and one of those is the big family farm and I'll cover this more under where it's for. But you know there are going to be some exemptions to this and exceptions, but the family has to understand this and take this into account.

Speaker 2: 8:53

The next situation is If you know the person's going into the nursing home within five years, it's not that you can't do this. Trust, if they have a lot of money, sure you want to stop the bleeding. At five years and having two or three million dollars, this still makes sense, even though the person is going into the nursing home today. Let's put it in there. That's congress's Agreement to say, hey, look, if, if you'll pay for five years, we'll pay for Anything after that. So sure, if someone's going into the nursing home.

Speaker 2: 9:30

It's not that the trust never works, but it's rare that they have enough money to get them through five years and then still enough money, still have enough money for this trust to work. So the other thing is, you know just if, if they're in perfect health, that amount that you keep for five years can be reduced because you're like chances are they're not going to go in for the next year or two. So all of this is very general, but I just don't want you to think, oh, this person has some assets they've asked me about an irrevocable trust, so let's do it. It's just truly not appropriate in those situations. The last situation which really not appropriate is the tax hits going to be so major is if that, if basically all of their assets are in IRAs or qualified money.

Speaker 2: 10:24

When it's in qualified money, that money's never had taxes paid on it and therefore for us to put it into this irrevocable trust, that is going to be a taxable event. They're going to owe taxes and once you get north of $450,000, $500,000, you're at the very highest tax bracket of about 40% federal tax and whatever your stake tax is. So you're easily pushing a 50% tax to get this IRA to be protected and when you start looking at enough money to put into this trust and make this worthwhile, your tax bill is so huge they've got to be in the nursing home, they've got to benefit from Medicaid by being in the nursing home for a really long time. It just doesn't make sense and so it is depressing. These are great when you're young and putting money, it's like, hey, I'm not paying taxes on this. But man, when you get owed and a client comes into you, they've seen, perfect, there's a home and some extra land, and they have $600,000, $700,000, $800,000, you're like, yep, this is a great, irrevocable case. And then you look at the financials and 700 of the 800 is in IRAs. You're like, ugh, this is not going to work. It's just sad, you know. And you just tell them look, this trust is just simply not going to work for you and I honestly don't know how we're going to get you onto Medicaid because most of your money has never been taxed and this is going to be a problem. Okay, so the dreaded IRAs. So when is the irrevocable trust appropriate? Obviously, the largest states. Okay. When you have someone coming in with two, three, $4 million and it's not in IRAs. That's a perfect case. You know your. You know Congress fusses at us every time they start looking at the Medicaid expenditures and fussing. It's like you got lawyers out there putting millionaires on Medicaid. Well, yeah, we're doing it because y'all make the rules and this is one of those situations. I'm not a huge advocate of this, but you can and it's our job to do what our clients want, following the rules. And if they have three, $4 million and they're willing to lose control of it and lose benefit of it, this trust makes total sense for them. Just know, keep out enough money to pay for the five years If they need it. Don't get them completely broke, but you can get them in a much better position five years from now for getting their care paid for through Medicaid than they are now. All right, this is always a fun.

Speaker 2: 13:18

Second case is where there's a family form and there's not much else. And you know I did mention above, if there's not enough money to get them through those five years, this is a problem. Well, if that's just, if it's just real estate and not much else, you know, just do some kind of payable on death deed on the house. Try to protect the house from probate, get it to the kids at death and you're done, or you know where they can sell it or do something with it. And dealing with the family farm that's been in the family for generations, they absolutely want to protect it, and particularly if the parents don't live there anymore. They own it, but it's not their home. It's a countable asset, all right, and so this is where the irrevocable trust comes in.

Speaker 2: 14:10

And so some of you out there was like, well, you could add their name to it as a joint owner and then it would not go through probate and under many Medicaid rules, if it's jointly owned with a right of survivorship, it is a non-countable asset, that is true. But when you add someone's name to it, you're going to lose part of your step up in bases, and many times that's important with this farm it's like, well, they may never sell. Okay, if they're never going to sell, then yeah, putting their name on it is a much cheaper option. But you just don't know. You just don't know what the family is going to do Once your client passes away. What if there's huge pressure to sell? They don't want to keep it anymore? There's going to be a capital gains issue. That's easily avoidable with the irrevocable trust.

Speaker 2: 15:01

A really good situation for the irrevocable trust, the asset protection trust, is when there is this piece of land that the family really wants to keep, even if there's no money. You just tell the kids look, y'all've got to either take care of mom and dad at home for as cheaply as possible or, if they go into the nursing home, y'all got to pay. That's your investment to protect this farm and get it to pass to you without Medicaid taking it, without losing your step up in bases. I mean this is going to be the best way possible Because I'll tell the client hey, this is going to be really cheap long-term care insurance for you. You're going to pay me for this trust, which is $7,000, $10,000. Bye, your long-term care is going to be paid for by the kids for the next five years and from the state from then on. So it's well worth it. The kids understand they're willing to chip in, hopefully, and keep mom or dad out of the nursing home, or Chip in and pay for the nursing home if they go in so they can keep this farm. Here's probably the ideal situation where the trust comes in.

Speaker 2: 16:14

And if you have someone in your office or a good friend who sells long-term care insurance. A really good scenario. Just the teaming up of two things is number one. If these people are fairly healthy, not going into the nursing home anytime soon, get them a basic long-term care insurance policy. Calling your friend who's will sell them. This policy can discuss that if you don't Get them a long-term care policy for just five years, okay.

Speaker 2: 16:46

So look, we're gonna buy this thing for five years. At the end of Five years we're gonna stop it, because at the beginning of the five years we're doing this irrevocable trust, putting as many assets in it as we can, and this way you don't need to keep out the two or three hundred thousand dollars to get through the five years, because the insurance policy is going to pay for it. Even make the kids pay for it. Let the kids pay the long-term care insurance, with the understanding that if mom and dad need nursing home care, this insurance policy is going to pay and we get to keep the Form okay or whatever is in the stress, whatever assets we put in this dress. And you put almost all of your assets then, knowing that the nursing home is paid for if they need it within the next five years and then, after five years, drop the policy. You don't need it anymore. Okay, that's just the the ideal situation where you know it's what the client needs. They need insurance to get through these five years. They have a tool that you're creating for them to protect basically all of their assets and it's just beautiful. It's the perfect situation to do this. But your client has to understand they are losing control and they are losing benefit of their assets. All right, so that's when our when not to use the eerie vocal trust. So please don't put families in a bad situation if you've created this trust and they don't have the assets to get through five years or Some Joe blow told them oh, you got to either get a divorce or do an eerie vocal trust. Generally, both of those are Bad ideas, except under very specific situations. And so the irreversible asset protection trust that's when to use it, when not to use it.

Speaker 2: 18:38

If you agree with me, I would love to hear from you. If you disagree, please let me know please if I've missed the boat on something. I am absolutely open to here. I would love to Learn. I don't think I know everything. I'm just telling you what I know and I am very open to learning new things, so if you hear something on this podcast or any podcast that you don't like, hey, let me know, be polite about it, let's talk about it, let's converse and teach me something. Okay, thank you so much for listening. Truly, do appreciate it. Please subscribe if you haven't Share with your friends and if you would like to do well to law Intensely and do it well. I Would love to be your coach. Give me a year and I can make you a pretty good out of law Attorney. Okay, thank y'all very much and we'll see you next time.

Speaker 1: 19:31

Thank you for joining this episode of the Elder Law Coach podcast. For those eager to take their elder law practice to new heights and are interested in Todd's acclaimed coaching program, visit wwwtheelderlawcoachcom. With Todd Wattley by your side, the journey to becoming an elder law authority has never been more achievable. Until next time, keep learning, keep growing and stay passionate about elder law.