We see many clients who come to us requesting an “asset protection trust” after doing their own online research. But an asset protection trust can mean different things to different people.
Some people consider “asset protection” as a means toward tax planning; other people consider it a means toward protecting assets in anticipation of long-term care; still others consider it a way to protect against creditors, or protecting the funds from misuse by gift recipients.
When you are considering using a trust for long-term care (Medicaid) planning purposes, there are two general types of trust options: the non-grantor (completed gift) trust; and the grantor trust. Both trusts are irrevocable, and in both cases, you give up your right to, and control of, the assets you place in the trust.
The grantor of a “completed gift” or “non-grantor” trust does not retain any right, power or authority over the trust assets. The trust must report the income and pay any tax liabilities. Although the “completed gift” trust does not provide the tax benefits available with the “grantor” trust, the completed gift trust does not have the retained powers that subject the trust assets to increased scrutiny by Medicaid.
A grantor trust contains certain provisions intended to cause the trust assets to be included in the grantor’s estate, for federal and New Jersey estate tax purposes. With this type of trust, the adjusted basis of each trust asset should be entitled to be “stepped-up” to its fair market value as of the grantor’s date of death. The downside to this type of trust is that it is less conservative as a Medicaid-planning device.
In order to determine whether an “asset protection trust” is right for you, there are many factors to consider, including your comfort level in giving up control of the assets in trust; whether your primary goal is estate/tax planning or long-term care planning; and your risk tolerance.