An irrevocable asset protection trust is a planning tool utilized to protect your assets should you or your spouse require long-term care and need to qualify for government benefits in order to pay for that care.

Individuals typically fund this trust with their real property (residences) and/or with financial accounts.

With these types of trusts, the person funding the trust, otherwise known as the Grantor or Settlor, must relinquish control over the assets by appointing a third party as the Trustee—the person responsible for managing the assets and distributing the property owned by the Trust pursuant to the trust’s terms. The Trustee cannot be a spouse, but may be another family member, such as a child or sibling.

So why create this trust? Below we list the benefits of creating an irrevocable asset protection trust and compare them with an outright gift of assets to your children.

Benefits of an Irrevocable Asset Protection Trust

  • This is a creditor-protected trust – it is not subject to your children’s legal and financial problems.
  • You may elect to receive income from the trust
  • You may receive principal “indirectly” from the trust
  • This is a Grantor Trust – meaning that for income tax purposes, any income generated by the trust is taxable to the Creator/Grantor of the Trust.
  • The ultimate beneficiaries of the trust will receive a step-up in basis on any appreciated assets owned by the trust (fair market value of the asset on the Grantor’s date of death). This will help reduce or eliminate capital gains tax on the future sale of that appreciated asset.
  • The Trust will provide for the complete distribution of your assets – even if a beneficiary predeceases you.
  • By utilizing this Trust, you avoid probate and the Trust assets are distributed directly to your named beneficiaries–without court intervention.
  • Any assets owned by this Trust will avoid the imposition of a Medicaid lien.


Benefits of an Irrevocable Asset Protection Trust if funded with Personal Residence

  • You (and your spouse, if applicable) retain the exclusive right to live in the residence for your lifetimes.
  • Allows you (and your spouse, if applicable) to retain any real estate tax exemptions, such as the STAR and senior citizen exemptions.
  • Allows you (and your spouse, if applicable) to utilize the capital gains tax exclusion of residence, if sold during your lifetime.
  • Your beneficiaries will receive a step-up in basis upon you death – thereby, inheriting the property at its fair market value at the time of your death, rather than the amount that you purchased it for. This will enable your beneficiaries to potentially eliminate or reduce any future capital gains tax on the future sale of your residence.
  • Your residence will not be subject to a Medicaid lien.


Why is an Irrevocable Asset Protection Trust preferable to an outright gift?

  1. An outright gift becomes subject to the beneficiaries’ legal and financial problems. While the money is in the trust, it is safe from these potential issues. For example:
    1. A beneficiary can squander the money.
    2. A beneficiary can be subject to a divorce proceeding.
    3. A beneficiary may have a law suit instituted against him/her.
    4. A beneficiary may go bankrupt.
    5. A beneficiary could even predecease you.
  2. There is a carry over in cost basis for any capital asset. This means that the recipient of the gift will obtain your original cost basis in the asset – which can result in a large capital gains tax for your beneficiary on the future sale of that asset.
  3. If you gift your personal residence, you will lose any personal tax exemptions, as well as your capital gains tax exemption amount.
  4. If a nursing home crisis occurs within five years of a gift made to a beneficiary, and one for the aforementioned problems occurs, the beneficiary might not be able to return the money/property. The failure to return the money/property could result in a significant financial liability to the nursing home, since a longer than necessary Medicaid ineligibility period would be