Learning to Juggle with Your Property

by Jerrold Bartholomew

Many of my clients are uneasy about placing their assets into a trust as part of an asset protection plan. In order to demystify the process and help you understand why you might consider having a trust drafted for your specific needs, I would like to explain some of the reasons you might consider having a trust and little bit of how a trust works.

Trusts are an important part of elder law and estate planning. Elder law is really the art and science of preserving personal and financial independence for seniors. Many forces threaten a senior’s independence, from ailing health to limited finances to extensive regulatory systems. The goal in creating comprehensive estate plans is to extend resources as much as possible and to create options. How is this possible? The right trust agreement is an important tool for achieving this goal.

Consider that property–whether a house, a car, or cash in the bank–can be owned by a trust. What this means is that a trustee will have control and legal title of property held in trust and a duty to manage that property according to the terms of the trust. This method of holding property has great flexibility and a number of important advantages.

To understand how this is possible, one must begin to see that under the law, ownership itself has many facets. It is possible, for example, not to own something for purposes of an obligation to a creditor, but at the same time to have full use and enjoyment of that same property. This apparent contradiction can be explained by the fact that beneficial enjoyment of property is not the same as simple ownership.

In general we tend to think about ownership like a baseball umpire thinks about a play at first base. Either the first baseman was holding the ball before the runner crossed first base or he wasn’t. In the same way, your name is either on the bank account number 5555551111 or it isn’t. Or so the everyday understanding of ownership goes.

If bank account number 5555551111 is held in trust for your benefit, whether you can be said to own that account will depend on whom you ask, when, and what the trust agreement says. The fact of the matter is that you can get very different answers about who owns what from the IRS and DHS, particularly with regard to property held in trust. In this way the rules of ownership with a carefully drafted trust will quickly start to seem more like juggling than baseball: you have control of the ball and sometimes you have the ball in your hand, but if you are a good juggler (or, to continue the analogy, you have a good trust) you will not be holding the ball at the critical moment. That is perhaps a tangled analogy, but it shows the delicate balancing that can be accomplished with a properly drafted trust (or a lot of practice juggling).

To give a more concrete example of how the various aspects of ownership can be effectively handled by a trust, consider that it is possible to have a trust with the following terms:

1. The principal placed in the trust will be unavailable for purposes of long-term care. Therefore, from the time property is placed in the trust, it will be out of the original owner’s name and the five year look-back period will begin to run.

2. For tax purposes, the principal held in the same trust will be owned by the original owner. The trust will not have to file a separate tax return, pay the higher rates that complex trusts are subjected to, or otherwise incur any additional tax liability for the original owner beyond the interest, capital gains, etc. that the original owner would otherwise have had.

3. The income generated by the principal held in the trust will be payable to the original owner. The assets held in the trust will therefore continue to provide support and income throughout retirement, but at the same time at least 50% of the assets held in the trust will be protected from the cost of long-term care. After 5 years, the entire principal will be protected from the cost of long-term care.

4. In some cases, this same trust can return the assets to the original owner. But only when the original owner decides it is necessary to do so.

A trust then, can be a legal document that allows you to enjoy your assets, but also to protect them. An attorney who understands the way that a trust will be read by the IRS, the Department of Human Services, the Department of Veteran’s Affairs and other government agencies can teach you how to juggle your finances and preserve your financial independence.

{ 2 comments… read them below or add one }

john peters June 28, 2008 at 9:31 am

Question #1. Once your assets are put into an irrevocable trust, are they then sheltered from medicaid for purposes of the 5 year look back period? That is, if this trust was established 4 years ago, would you have 1 year left of the look back period? Or if we did the trust today, and all assets (excluding house, car, burial plots and the $104,400) are in the irrevocable trust, does the look back period begin tomorrow and none of my assets will be touched for purposes of applying for Medicaid moving forward and will not impact the date that I can go on Medicaid?



Jerrold Bartholomew July 2, 2008 at 12:13 am

Mr. Peters,

Thank you for your thoughtful comments. In response to your first question, yes, placing your assets in a properly structured irrevocable trust will begin the lookback period. With respect to the second, it appears to me that you are concerned with a situation with one spouse in the nursing home and a non-institutionalized spouse. In a case like that, I would generally advise a different type of irrevocable trust that will allow immediate qualification. This trust is called a solely for the benefit of trust, and while it does not protect assets in the event that the second spouse would need nursing home care, it does allow for assets to be protected from the cost of one spouse’s long term care needs.


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