As we age, we have a greater likelihood of needing to spend time in long-term care. For those over age 65, there is a 75% chance that you will not be able to live alone for the rest of your life. When you have to move from your home, the costs for the nursing home can exceed $12,000 per month.  While asset protection planning for Florida Medicaid is possible, even during the five year look-back period, it may be best to look at setting up an irrevocable asset protection trust five years before you need long-term care.

Attributes of Irrevocable Asset Protection Trusts for Medicaid (and VA benefits)

  • Senior couple considering a irrevocable asset protection trustEstablished by yourself or your attorney-in-fact five years before you apply for Florida Medicaid benefits.
  • You have no access to the trust principal during your lifetime.
  • You may maintain an income interest in the trust if you want.
  • You name a trustee to manage the trust assets during your lifetime. Generally, your children are the lifetime beneficiaries but the assets do not go to the children until your death.
  • Assets in the trust protected after the five year Medicaid transfer penalty expires. 
  • Asset in the trust receive a step-up in basis upon your death, meaning your heirs can sell the trust assets tax free upon your death.
  • You can give assets to this trust three years before you need VA Pension benefits.

Why would you want an Irrevocable Asset Protection Trust?

Most trusts created for estate planning purposes are revocable and changeable during your lifetime in order to avoid probate upon your death. But a regular revocable living trust is not an asset protection device.But, if you want to help ensure that your children receive an inheritance, then creating an irrevocable asset protection trust may be a good option.  Here is an example of this type of trust:

Dad, age 80, is healthy.  He has a home and about $500,000 in the bank and in brokerage accounts.  He has 3 children he trusts and that he wants to leave a legacy for.  After consultation with our office, he believes his health will last at least for the next five years. With this, he establishes an irrevocable trust and transfers some $400,000 of his assets, including his home, to his trust.  His most trusted child is trustee of this trust, which distributes all trust income to Dad during his lifetime, but no trust principal.  After five years, the trust assets are protected in the event dad goes into the nursing home and needs to apply for Medicaid. Upon Dad's death, the trust assets, now valued at $500,000 (from $400,000) due to growth, are distributed equally to his children, who also receive the assets with a "step-up" in basis, meaning the trustee can sell the assets income tax-free.

Here, Dad retained enough money to keep for his own enjoyment and he had his own pension and social security to live on. He created this trust to leave a legacy to his children, and he had a trusted family member to serve as trustee.  While not for everyone, irrevocable asset protection trusts can be a way to make sure your hard-earned assets do not disappear to the high cost of nursing home/long-term care.

Other Ways to Protect Assets From the Nursing Home

While this article is mainly about irrevocable trusts done 5 years before someone needs Florida Medicaid, many people to not do enough advanced planning to protect their assets from the nursing home. If you are reading this article, it is highly likely that your loved one is already in the nursing home and/or you are well within the 5 year lookback period. If you are looking for Medicaid in the short term, you should know the following:

Incidentally, I use the term "protect your money from the nursing home" but I do not really like it. The reality is that the nursing home does not really take your money - the nursing home is just an expensive hotel that you must pay for until Medicaid will help pay for it. A good elder law attorney can help Medicaid pay for the nursing home (and other places) without spending all of the elder's assets.

Factors That Make an Irrevocable Asset Protection Trust a Good Choice

  • The size of your estate – your assets (outside your home) should probably exceed $150,000 in creating an irrevocable trust to protect your assets from the high cost of nursing home care. (note that there is no minimum but the costs to set up the trust are fairly high, so we generally want to make sure it is all worth it).
  • Trusted and responsible family member(s) to serve as trustee - very important!
  • A desire to leave or preserve a legacy to your family - we would not recommend this type of planning for people who are not trying to protect assets for future generations, for instance

What about Protecting Your Homestead Property?

An irrevocable asset protection trust may hold your Florida homestead property and protect it in the event you need to go onto Medicaid. Even if you do not have a great deal of assets other than your home (such as in the example above), then it may be helpful to place your homestead property into an irrevocable trust. I have written a guide to Protecting Your Florida Homestead Property if you want to learn more. 

Why not just give assets outright to the children?

There are a number of ways that irrevocable trust planning is better than outright gifting, which are generally:

  • If you just give assets to the children, will they spend it before you die of if you get sick and need the money? Having all the assets in the irrevocable trust only be distributed to your children upon your death, while keeping it in one location until then, is likely a better solution
  • If most of your assets are placed in the irrevocable trust and you had a serious and unexpected downturn in health, the current trust beneficiary could terminate the trust and return the assets to you
  • If you just give assets to the children, the assets do not receive a step-up in basis upon your death, potentially costing the family a great deal of money if your assets have gone up in value. Upon your death, your assets are not valued at their original basis, but will receive a new basis based upon the asset’s date of death value.  This is generally referred to as a “step-up” in basis, which allows heirs to sell property without paying taxes on the gain during the decedent’s life.  Thus, your heirs inherit the property with the date of your death value, thus providing a tax free gain in appreciated assets to your heirs.

Gifted property, on the other hand, such as giving your appreciated stock to your children, does not receive the step-up in basis upon death.  The interest in the gifted property has the donor’s original basis, which means that any gain in asset value may be taxed upon sale.  To make things easier, please see the following:

Example: Mother purchases Exxon stock in 1990 for $40,000.  The stock has appreciated to its present value of $200,000.  To protect the stock from the nursing home, she gives it away to her daughter five years before she gets sick.  If the daughter sells the stock, she have to pay income taxes based upon $160,000 in gain.  This gain would be taxed at a rate that could exceed 40%, based upon daughter’s income tax rate, costing the daughter some $60,000(+) in income taxes when she sells. 

Example 2: Same facts as above, but mother places the stock into an irrevocable trust. Daughter holds the stock in the irrevocable trust for mom's lifetime. When mom dies, the daughter inherits the stock tax-free, as the stock receives a step-up in basis upon mom's death.  She can now sell the Exxon stock without any gain!

What other options (besides an irrevocable trust) exist if we want to protect our assets from the nursing home?

If you do not want to lose control of your money five years before you get sick, we have more on Medicaid planning options on this webpage. The basic answer is that you can:

  1. Purchase long-term care insurance or life insurance/annuity policies with long-term care benefits inside them. These options are generally more helpful than giving all of your money away as the law may change in the future.
  2. Your basic estate planning. Make sure you have a good estate plan, such as creating a revocable living trust and a great durable power of attorney prepared by a Florida elder law attorney.  These documents will allow your assets to be protected by a good elder law attorney, even in a crisis.
  3. Look to VA benefits, although we generally would look to VA benefits to pay for in-home care or assisted living because the nursing home is so expensive. We have more information on VA pension benefits and irrevocable trusts here.

More Information on Asset Protection Trusts

We recently created our free guide to Irrevocable Asset Protection Trusts.  The information presented here is given with a more detailed explanation of Medicaid and VA benefits, among other matters.

Most trusts created by attorneys are revocable living trusts.  These trusts enable you to control your assets during your lifetime but also avoid probate upon your death. But standard revocable trusts do not protect your assets from the high cost of nursing home care. This blog post has more on revocable and irrevocable trusts for your consideration, which also includes special needs trusts in Florida as well.

What if the elder is already in the nursing home?

This article is mostly written for those looking to protect their assets at least five (5) years before they would apply for Florida long-term Medicaid. If your loved one is already in the nursing home or may be in one soon, we have more information on Medicaid and spend down planning. If your elder just went to the nursing home due to a downturn in health, you will want to read more on common questions to ask if your elder just went to the nursing home.

Just had a dementia diagnosis?

If you or your loved one recently had an Alzheimer's or dementia diagnosis, you would want read about legal steps to take upon a dementia diagnosis. You may also want to download our free Guide to Alzheimer's Care from our website.

Get a Free Copy of our Books!

Free estate planning guide by Rep DeLoach

We have two books that you can download for free:

If you want to learn more about estate planning in Florida, including asset protection planning and irrevocable trusts, the Top 20 Ways to Protect Your Florida Estate will be very helpful.

If you want to learn more about long-term care, asset protection, Medicaid and VA benefits, we have another book: Protect Your Nest Egg from the Nursing Home. This book deals less with estate planning issues and more with caring for a loved one already in the nursing home and for ways to protect your assets both before you are sick and even if you are in the nursing home.

D. Rep DeLoach III
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Estate Planning and Board Certified Elder Law Attorney