CATEGORIES: Elder Law, Medicaid Planning, Estate Planning, Creditor Protection, Asset Protection Trust, Irrevocable Trust, Trusts, Advance Planning, Winston Salem, North Carolina, NC.
An irrevocable Asset Protection Trust (APT) may be used as part of an advance asset protection planning strategy, to help a client create a “nest egg” of assets to be passed to his loved ones free from the claims of unforeseen future creditors. Such trusts can help protect estates against large future medical care bills, such as bills from Medicaid Estate Recovery, hospital, or nursing home bills, or other unforeseen future liabilities such as legal liabilities, auto accidents, financial liabilities, bankruptcy, or can provide financial protection from nefarious family members.
In order to create an APT free from unknown future creditors in North Carolina, the trust must be designed so that the trust grantor, who sets up the trust, does not benefit directly from the trust assets. The trust beneficiaries, however, may benefit from APT assets during the grantor’s lifetime—in fact the APT may be set up to start benefitting a spouse (see item 4 below), children, or other beneficiaries immediately.
When the client’s estate is large enough to make a gifting strategy useful, it may make more sense to set up an APT instead. The StepAPT™ asset protection trust is designed to protect close family members, and provides these benefits:
- The StepAPT™ Can Provide Creditor Protection to The Grantor. Making a proper transfer into the StepAPT™ is legally very similar to making a gift to a family member. Once the grantor properly transfers assets into the StepAPT™, North Carolina and federal law considers this a transfer out of the grantor’s estate for creditor purposes, and future creditors such as Medicaid or hospitals cannot legally reach the assets in the APT.
- The StepAPT™ Can Provide Creditor Protection to Trust Beneficiaries. The StepAPT™ may be set up to provide creditor protection to trust beneficiaries both during the grantor’s life, and after the grantor’s death.
- A Beneficiary May Serve as His or Her Own Trustee. If appropriate, a non-grantor beneficiary can be set up as Trustee, so that he or can distribute assets to himself or herself according to the terms of the trust, while still retaining valuable creditor protection.
- The StepAPT™ May Be Set Up to Protect Spouses. If the Grantor has enough assets so that the need to use Medicaid to pay for long term care is not likely, the StepAPT™ may be set up to benefit and protect a grantor’s spouse. Spouses can decide to set up asset protection trusts for each other.
- The StepAPT™ Provides a Step Up in Tax Basis Which Can Greatly Reduce Taxes on Appreciated Assets. Transferring appreciated assets by gift, like a house, family farm, or stocks that have appreciated, can cause the gift recipient to pay capital gains taxes on all of the increase in value during the giver’s lifetime, which can total thousands of dollars, or more. Putting assets in a StepAPT™ asset protection trust, however, provides a step up in basis to the beneficiary, so that all of the capital gains accumulated during the grantor’s lifetime are erased. The beneficiary then only owes capital gains taxes for asset appreciation between the time that the grantor dies, and the time that the beneficiary sells the asset.Here is an example of how important getting a step up in basis can be: Suppose Dad bought a family farm in 1945 for $50,000. That farm then increases in value so that it is worth $500,000 in 2017. Then Dad gifts the farm away to son Bob in 2017, and Dad dies on January 1, 2018. If son Bob then sells the farm, at a 15% federal capital gains tax rate Bob would have to pay the IRS $67,500 in capital gains taxes for the farm’s appreciation during Dad’s life.If Dad would have benefitted Bob by placing the family farm in the StepAPT™ instead of making the gift to Bob, Bob would have received the step up in basis, the $67,500 would be erased, and the family would have saved $67,500 in income taxes.
- Not a Medicaid Asset. Any assets placed into the StepAPT™ are not countable as Medicaid assets, thus are protected from Medicaid. But because the StepAPT™ is an advance planning tool, and Medicaid considers transfers into an irrevocable trust as gift transfers, assets must be transferred into the StepAPT™ more than 5 years before the grantor uses Medicaid, to avoid penalties. The StepAPT™ should not be set up to benefit spouses when Medicaid may later be needed.
- The StepAPT™ Avoids Probate. Assets placed in the StepAPT™ do not pass through probate following the grantor’s death, making the surviving family’s job easier.
- The StepAPT™ May Reduce Income Taxes. The StepAPT™ is designed as a grantor trust, which means that income taxes paid by the trust are taxed at the grantor’s individual tax rate during the grantor’s lifetime, which is normally lower than a trust tax rate.
When using an APT, such as the StepAPT,™ it is important to plan early. An APT will not protect against any already known creditor, so trust assets cannot be moved into the trust to escape that creditor. Planning early helps assure that assets placed in an APT will be protected against any unknown future creditors, both under North Carolina and federal law.
USING A StepAPT™ WITH A REVOCABLE TRUST
The different, popular Revocable Living Trust (RLT) does not protect trust assets from the grantor’s creditors during the grantors life, or from estate creditors immediately following his death. But a revocable trust does allow the grantor to easily pull assets out of the trust at any time to benefit him during his life. An irrevocable StepAPT,™ cannot benefit the grantor during life, but it can protect against creditors both during life and following death.
A flexible estate planning strategy may include forming both a revocable living trust and a StepAPT™ for the client, allowing the client to utilize the best features of each type of trust. If a client has a downturn in health, or for any other reason, the revocable trust trustee may flexibly protect any amount of assets at any time by moving them from the revocable trust to the StepAPT™.