Value of starting the clock on asset protection plans

attorney-feesMany asset protection plans we prepare for clients provide future financial security; that is, the client has no immediate financial threat, but one or more could arise in a few years. Undue influence from family or strangers, nursing home spend-down, or possible lawsuits could occur, but no one expects them anytime soon.

As to nursing home costs, the asset protection plan has value because it makes assets unavailable for spend-down and avoids penalties that arise from the five-year look-back period – but only if the plan is put in place soon enough.

An example demonstrates this point.

Assume Gladys, age 79, a Pittsburgh widow, owns $600,000 in assets she hopes to protect with an asset protection trust. Her income is $2,500 a month. She is currently healthy enough to live independently at home. We’ll assume (based on our current experience with clients in Allegheny County) that skilled nursing home costs will total $10,000 a month.

That means Gladys would need to spend $7,500 a month from her assets ($10,000 minus $2,500) to pay for nursing care if she needed it. If she creates and funds her asset protection trust now, the least she could protect from nursing home spend-down is $150,000. That’s because even if she, say, suffered a stroke the day after funding her trust, and beneficiaries used distributions from the trust to pay for her care, they would only need to pay for five years (60 months of care) until the trust funding was beyond the look-back penalty period. Therefore, paying for five years of care requires $450,000 ($7,500 per month X 60 months), leaving $150,000 protected in the trust.

But notice that for every month Gladys stays healthy enough not to need nursing care, the amount required to pay for care drops by $7,500, with a corresponding increase in the amount protected.

Staying healthy one month therefore leaves $157,500 in the trust; two months leaves $165,000; three months leaves $172,500; and so on.

Once Gladys realizes that her protected assets increase by $7,500 a month, she knows the importance of starting the clock ticking as soon as possible.

At our workshops, we discuss asset protection trusts (why they’re important and how they work) in more detail. The workshop is free, but you need to register in advance to make sure you have a reservation.

Suitability of an Asset Protection Trust

When, and for whom, is it the right choice?

In the past, trusts were seen primarily as a means of transferring wealth from high net worth clients to their loved ones.

 In recent years, innovations in trust planning have made them useful in the estates of middle-class clients. They are now used to protect estates from being lost due to the effects of living longer, having diminished capacity, and spending more years being vulnerable and ill.

Asset protection trusts can help to avoid loss to the costs of long-term care, as well as potential lawsuits, scams, undue influence, and other dangers.

Like most estate planning tools, an asset protection trust is a powerful tool in the right circumstances, but certainly not appropriate for everyone. An experienced elder law attorney should know the situations in which it works best.

 An ideal candidate is often an elderly person, or married couple, who has accumulated a fair amount in assets and wishes to protect the estate from the various dangers just discussed, but is not typically high net worth. It is best if the person is healthy enough to be likely to get through the next five years without needing skilled care in a nursing facility, or in the alternative, has long-term care insurance to help get through a Medicaid look-back period.

 Also important are the types of assets a client owns. If much of the estate is held in qualified retirement funds, adverse tax consequences may make the trust unsuitable. On the other hand, a house, investment fund, savings, and other assets not required to fund living expenses can be perfect for asset protection using a trust.

 Family dynamics also affect suitability. An ideal candidate for an asset protection trust has close, trustworthy family members to name as trustees, successor trustees, and beneficiaries. The trust may last for a number of years, and these family members can play an important part in making sure that the trust achieves its purposes. Unexpected circumstances may arise, and require modification, or even termination, of an asset protection trust. Family harmony will help in navigating rough waters.

 There are other factors that affect suitability of an asset protection trust, but these of the factors most commonly considered.

 At our regularly held workshops, we discuss asset protection trusts in detail. Attending a workshop will help you learn more about how a trust can protect you and your family, and provide a more secure future.


POAs in 2015 require greater attention to asset protection

Asset protection has grown in importance as a consideration in estate planning. Americans live longer now than ever before, and often spend more time in their senior years having diminished ability to manage their own affairs, or even to take care of themselves.

As a result, their estates are vulnerable for a number of reasons. They may be more vulnerable to lawsuits if they can’t drive well or take care of their properties. The unscrupulous may take advantage of their trust. They may need expensive nursing care for years.

The use of trusts has risen as a way to protect assets from depletion and save them for loved ones.

But it may get harder to use trusts for this purpose starting in 2015 (at least in Pennsylvania).

Here’s why. An important feature of a good asset protection plan is the ability to change course and adapt to changing circumstances. For example, a couple aged 80 and 78 may establish an irrevocable asset protection trust when they are in good health, and place most of their assets into it. Three years later, though, the husband (George) has dementia and enters a nursing home. A better strategy at that point may be to terminate the trust and divide assets according to Medicaid rules, making sure that George’s wife can keep and use as much of their combined estate as possible if George qualifies for Medicaid.

However, there’s a problem. Because George prepared his POA in 2015, it is subject to the rules of interpretation under Pennsylvania’s new statute. One of those rules is that an agent acting under a POA may “create, amend, revoke or terminate” a trust “only if the power of attorney expressly grants the agent the authority” to do so.

Unless George, or his attorney, anticipated this issue and specifically included a provision in his POA to allow George’s agent to consent to termination of the trust now that George has dementia, the assets may be tied up in the trust. Worse yet, the transfer of assets to the trust can earn the couple a period of ineligibility for Medicaid benefits if it was within Medicaid’s five-year look-back period.

The problem is easily managed if, when George set up his trust, he also obtained a good power of attorney that gave his agent all the powers that might be needed if his circumstances changed, especially during the first five years of the trust’s existence.

On the other hand, form POAs obtained from a non-specialist, bought as part of general estate planning software, or downloaded from the internet may pose dangers for the unwary under the new POA statute.

Bottom line: Make sure your power of attorney contains the right provisions to support your asset protection strategy.

Why use an IRA trust?

Andrew Sykes presents "12 Cool IRA Protection Strategies" to Pittsburgh area financial advisors on October 17, 2013

Andrew Sykes presents “12 Cool IRA Protection Strategies” to Pittsburgh area financial advisors on October 17, 2013

Qualified retirement plans, like IRAs, can have superior advantages when left to a loved one. Chief among those advantages is the ability to “stretch” distributions, which can double or triple the lifetime value to the beneficiaries.

But your plan to leave retirement assets to your beneficiaries may get tripped up in various ways. Here are a few:

Rapid depletion. Rather than carefully stretching distributions over allowable life expectancy, the beneficiary may take down all the money much sooner (perhaps right away). Rapid depletion will foreclose long-term tax deferral, and could very well mean the beneficiary pays more in taxes on the amount distributed. Early depletion can also diminish the chances that proceeds from the inherited IRA will benefit grandchildren or other heirs.

Divorce. Depending on state law, some portion of the distributions could be lost to former in-laws if a beneficiary divorces. (The “lifelong probability of a marriage ending in divorce is 40%-50%,” according to statistics cited in Wikipedia.)

Creditors. Creditors may be able to reach inherited IRAs. A ruling earlier this year in the Seventh Circuit Court of Appeals for the Seventh Circuit held that inherited IRAs do not fit the Bankruptcy Code’s exemption for “retirement funds.” Other appeals courts have held the opposite. But unless the Supreme Court overrules the Seventh Circuit’s ruling, creditor protection for inherited IRAs will depend on where your beneficiaries happen to live.

A well drafted IRA trust can mitigate the effects of these pitfalls by controlling how and when distributions are taken from the trust, and providing an additional layer of protection from the effects of divorce, creditors, and other unexpected occurrences.

A pet trust for Fluffy

You don’t have to be Leona Helmsley to set up a trust for a beloved pet.

After the billionaire Helmsley’s death, her white Maltese lived in the lap of luxury on its multi-million dollar trust fund. But Pennsylvania law allows people of even modest means to provide for a dog, cat, or other animal that is as dear as a family member (or, let’s face it, more dear than that nephew who drops by only when he needs help paying his bar tab).

Suppose you’re concerned about Fluffy, who greets you with wild tail-wagging each morning, listens attentively to everything you say, and never talks back. What will become of Fluffy when you die or go to a nursing home? Who will walk him and buy him his favorite smoked pig ears?

In recent years, Pennsylvania joined about 40 other states that have passed laws to make pet trusts valid and enforceable. Such statutes are important because pets (otherwise considered property by law) cannot inherit from their owners.

Under a pet trust, you give Fluffy, along with enough money to pay for his care, to a trustee. The trustee, usually a trusted friend or bank, has a duty to arrange for the proper care of the pet according to your instructions.

You can establish a pet trust for Fluffy during your lifetime (called an “inter vivos” trust), or by means of a clause in your will.

One advantage of an inter vivos trust is that it can go into effect as soon as you become unable to care for your pet. A clause found only in your will may not be discovered until after Fluffy has gone hungry or been given away.

Your pet trust should contain specific instructions about Fluffy’s care, such as the type and amount of food (and any specific brands) he eats, medical care (including preferred veterinarian), grooming needs, daily routine, favorite treats, toys, and so on.

Determine who the trust should name as Fluffy’s caretaker. The trustee will deliver Fluffy to the caretaker for care according to your instructions.

Check to make sure the caretaker you name is willing to take on the responsibility. That will put you one step ahead of Leona Helmsley, whose proposed caretaker reportedly had no interest in the post. Be sure to name a substitute caretaker in case your first choice dies, or is unable to provide care.

You can fund the trust up front, or provide for funding through a bequest in your will. The funds can come from your estate, or from some other arrangement such as life insurance, a “pay on death” account, annuity, or retirement plan. Depending on your pet’s needs, the trust may require as little as $200 to $2,000 a year.

If you set up an inter vivos trust, you may also need to change your will to make reference to the trust and perhaps provide additional funding.

Under Pennsylvania law, the trust lasts until the end of your pet’s lifetime. If you have set up the trust for more than one pet, it will last until the death of the last surviving animal. Any remaining funds will then return to you, if you’re still alive, or can pass to a beneficiary you name.

You will probably also want to leave instructions about disposition of the pet’s remains after its death, such as burial or cremation.

An attorney knowledgeable about estate planning, and pet trusts in particular, can help you set up a pet trust that complies with Pennsylvania’s trust laws.

Fluffy might not eat hand-fed meals from a silver serving set like the Helmsley dog, but you can rest easy knowing Fluffy will have his smoked pig ears even when you’re gone.