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One focus of RI Elder Laws is to assist seniors with planning for possible long term care expenses. At the present time, planning will often focus on eligibility for Medicaid and for Veterans benefits. Irrevocable trusts are popular asset protection planning tools, and are frequently used in both Medicaid planning and Veterans planning. Asset protection trusts allow you to transfer certain assets into an entity that will be managed by a designated person who is financially competent and trustworthy.
A trust must be irrevocable to provide any asset protection. Generally, irrevocable means that the trust cannot be changed. However, RI attorneys provide that there are certain provisions that provide flexibility. For instance, if the person who creates the trust retains a special power of appointment, then that power can exercised to change the beneficiaries at a later date. Asset protection trusts can be designed to protect the assets from the creditors of the beneficiaries and from beneficiaries divorce claims as well. Thus, asset protection trust provides far superior control than outright gifts to children.
Generally speaking, any rights that are retained by the grantor (the person who creates the trust) will be considered legally available. In RI Medicaid planning, individuals often create an irrevocable trust and retain the rights to any income earned by the trust but relinquish the rights to trust principal. This makes the principal unavailable for Medicaid purposes. However, funding such a trust is considered a prohibited transfer and is subject to a five year look back period.
In Veterans planning, Rhode Island attorneys state that retaining the rights to trust income will make the trust principal and the trust income available to the grantor. Thus, for Veterans purposes a retained right to income is not recommended.
There are many significant tax issues that need to be addressed in designing an asset protection trust. If the trust is to hold a principal residence it is important to create a grantor trust for income tax purposes. This will preserve the tax exemptions that apply to the sale of a principal residence.
Transfers to asset protection trusts can be structured as completed or incomplete gifts. If the transfer is incomplete, the assets will be included in the estate of the grantor and the basis of the assets will be stepped-up at the death of the grantor. This usually means that the beneficiaries will save on capital gains tax. If the transfer to the trust is complete, a gift tax return may be required and the trust will maintain the same basis in the assets as the grantor of the trust. This means that capital gains tax may be due on the sale of the trust property.
With respect to Medicaid eligibility, funding an asset protection is considered a prohibited transfer and is subject to a five year look back period. In addition, many cities and towns will not continue property tax exemptions when a home is transferred to an irrevocable trust. Lastly, refinancing real estate held in an irrevocable trust can be difficult and reverse mortgages will be impossible.
The Rhode Island Supreme Court licenses all lawyers in the general practice of law. The court does not license or certify any lawyer as an expert or specialist in any particular field of practice.