Asset Protection Planning for Seniors

I.    Introduction

    Today’s seniors have worked their whole adult lives to save up their nest eggs. Whether their retirement savings are large enough to carry them through depends on many factors, including their investment returns, the rate of inflation, how long they will live, and their health during retirement.

    According to the Society of Actuaries, a man who reaches age 65 has a one in two chance of living beyond age 85 and a one in four chance of living beyond age 92. Women are likely to live even longer. For a couple reaching age 65, there’s a one in two chance that one spouse will reach age 92 and a one in four chance that one will reach age 97. That is a huge longevity risk.

    This means that to be safe, any financial planning should anticipate the possibility that the client will reach age 90 for a single person and age 100 for a couple, unless their health and family history indicates that a shorter life expectancy is likely. Websites and services exist which can help fine tune the life expectancy predictions for individual clients.

    I will leave the question of forecasting and planning for expenses and investment returns to the financial planners.  My concern is how to protect seniors and their loved ones if bad things happen, such as a need for long-term care, a child needing help due to illness, the loss of a job, or divorce, or bad decisions about investments or re-marriage.

    I recently met with a client whose husband had died after a long fight with Alzheimer’s disease. The illness and his care did not greatly deplete her savings because he was lucky enough to qualify for excellent care through the Veterans Administration. However, she went immediately from attending to her husband to pitching in and helping take care of her grandchildren. Her daughter had suddenly become a single parent when she found out that her husband had gambled away their savings and borrowed against their credit cards. 

    The daughter separated from her husband and put her house on the market. In addition to filling in with child care while her daughter was at work, my client was helping out financially and expecting to contribute to the down payment for a smaller townhouse for her daughter and grandchildren. My client was concerned about what she could afford, whether supporting her daughter would be fair to her other children, and what would happen to money she left her daughter if it came to her in the middle of a divorce or if her daughter died and the money went to her soon-to-be-ex husband.

    Fortunately, planning tools are available to clients such as mine and to many others. This outline will describe these tools, which include long-term care insurance, homestead declarations, durable powers of attorney, irrevocable trusts and family protection trusts to protect against creditors, the cost of long-term care, divorce, and other risks of modern life.

II.    Basic Estate Planning

    A.    Durable Powers of Attorney, Health Care Proxies, and HIPAA Releases 

    Durable powers of attorney and health care proxies are well-known mechanisms for appointing an agent to act for us in the event we become incapacitated for any reason. The durable power of attorney delegates the power to make financial and legal decisions and the health care proxy delegates the power to make health care decisions.  
    In both instances, the execution of either document does not take away our rights to make those decisions ourselves. For those who have not executed a durable power of attorney or a health care proxy, family members may have to seek the court appointment of a guardian if it becomes necessary to make financial, legal, or health care decisions. This can be an expensive and cumbersome process, especially if family members are in disagreement. It also can interfere with taking necessary steps to protect assets, since most actions under guardianship will need court approval.

    The appointment of agents under durable powers of attorney and health care proxies are essential to asset protection planning. Doing so can prevent family strife and save substantial time and money when we need someone to step in for us to make decisions. They are the first step in any estate planning and asset protection plan.

    While the health care proxy authorizes an agent to make health care decisions for an individual under Massachusetts law, state law does not trump federal law. Under the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), medical professionals may not release health care information to anyone, even a spouse or child, without a release.  Some facilities and personnel are more rigid than others in following the letter of this law. The usual practice since enactment of this law has been to include HIPAA releases in durable powers of attorney and health care proxies. But this may not be enough.

    First, the client may want to have different people in these roles.  Second, she may want to give all family members access to information, but not give them all decision-making authority or responsibility. Third, she may be going into a hospital for a short procedure that would not rise to the level that would trigger a health care proxy, but during which she wants family members to communicate with her medical providers.  Fourth, sometimes health care professionals not only won’t provide information to family members, but they won’t even listen to family members trying to provide important information, thus confusing a restriction on the release of information with a restriction on the receipt of information.

    For all of these reasons, any modern estate plan needs to include a HIPAA release as well as a durable power of attorney and health care proxy.

    B.    Revocable Trusts
    Revocable trusts serve two main purposes: management of assets and avoidance of probate. A trust is a document which sets out the guidelines for managing the property transferred to it. Every trust has one or more trustees who manage the trust property for one or more beneficiaries.  Typically, the grantor or creator of a revocable trust also serves as a trustee and as the principal beneficiary during his life.  The trust will provide for successor trustees in the event of his incapacity and successor beneficiaries in the event of his death.

    The appointment of a successor trustee can be a simpler way to provide for property management than a durable power of attorney and, for reasons that are difficult to explain, successor trustees are more often accepted by banks and investment firms, which often put up roadblocks to honoring durable powers of attorney. Revocable trusts also are easier to tailor than durable powers of attorney, permitting the grantor to be very specific about the terms governing the use of the trust property.

    Finally, revocable trusts avoid probate. Probate is the judicial process through which property of a deceased person is passed on to the beneficiaries under her will or, absent a will, as set out in the Commonwealth’s laws of intestacy. It is not as difficult or expensive a procedure as is often described, but it does entail some cost and some delay in the distribution of assets to heirs. These costs and delays can be avoided through the use of a revocable trust.

    C.    Joint Accounts

    Joint accounts at banks or investment firms can serve some of the same functions as durable powers of attorney and trusts. Joint owners on accounts all have the right to make withdrawals and when one joint owner dies, the account continues to belong to the surviving joint owner or owners. As a result, many seniors use joint accounts as alternatives to powers of attorney, trusts and wills.

    There are several potential problems with this approach. First, all joint owners are equal owners of accounts. This means that they can legally withdraw money and use it for their own purposes. It also means that the funds are subject to claims by the creditors of every joint owner in the event of a lawsuit, bankruptcy, or divorce. A parent who has added a child to an account may not be too happy to see half of the account go to the child’s ex-spouse.

    Second, the use of joint accounts to substitute for a will or revocable trust often results in unequal distribution of assets on a parent’s death. We have seen many seniors attempt to use joint accounts in this fashion—for instance, setting up three separate joint certificates of deposit for each of their three children. This can be a headache when trying to make sure all three accounts stay equal.  And they can end up being very unequal when one account gets spent down first to pay for the parent’s long-term care costs. The children may equal things out among themselves, but then again, they may not.

    Joint accounts work best when there’s only a single child to inherit assets and for the senior’s primary checking account so that one or more children can help pay bills and will have access to some funds to pay funeral and estate costs when the time comes.

    D.    Homestead Declarations

    One of the easiest and cheapest asset protection tools available to seniors and anyone else who owns a home is a declaration of homestead.  Any Massachusetts resident may file a declaration of homestead at her county’s registry of deeds and protect $500,000 of equity in the home from creditors. For co-owners over age of 62 or who are disabled, each may file such a declaration—thus protecting a greater amount of the home’s equity.

    The homestead protects the equity from lawsuit or in bankruptcy. Typically, however, banks require that a homestead be removed before they will extend a mortgage or refinancing so that their claim will be protected. Also, the homestead declaration does not survive the death of the homeowner and, thus, will not protect her estate from creditor claims. And it will not protect the proceeds of the sale of a home from claims by creditors.

    Nevertheless, the homestead declaration is relatively easy and inexpensive to prepare and file and should be recorded by every Massachusetts homeowner.  Each registry of deeds will assist homeowners in completing and filing the declarations.

III.    Long-Term Care Planning

    A.    The Risk

    The greatest financial risk for older Americans is that they may need long-term care. Nursing home care in the Boston area today typically costs $120,000 a year. Around-the-clock home care can cost even more.

    Of course, none of us knows if we will need long-term care, what sort of care we will need, or for how long. But some statistics give us guidance. They tell us that most likely, we will not need any care before the age of 85, but there’s a good chance we will if we live beyond that age. Of men aged 65 to 69, 8 percent have moderate to severe memory loss. Of those over age 85, more than a third have moderate to severe memory loss. For women, the figures are just 3 percent for the younger group and 31 percent for older women.

    The rate of nursing home residence increases from 1 percent for those between ages 65 and 74, to 4 percent for those aged 75 to 84, to 18 percent for those 85 and older. These numbers, of course, don’t count the seniors who need assistance at home or need to move to assisted living, but who are not in a nursing home. But they do reflect the great risk of the need for care for anyone who lives past his or her 85th birthday.

    In addition, aging affects some people more than others. Whether an individual suffers from an illness or disability depends in part on luck, including the luck of being born with the right genes or the luck of having worked in the right kind of jobs.  But we can also make our own luck. Physical and mental activity as well as a healthy diet can reduce the risk of heart disease, other illnesses, and dementia. Smoking and obesity increase those risks.

    Individuals, when planning for their own futures, can modify the general statistics cited above based on their own family and individual histories to make an educated estimate of how long they will live and whether and when they are likely to become disabled. Someone with two parents having suffered from Alzheimer’s disease is more likely to have it as well than someone whose parents both lived into their 90s with no cognitive impairment.

    The following discusses the various options for planning to protect assets in the face of this risk of high long-term care expenses.

    B.    Long-Term Care Insurance

    While the decision whether to purchase long-term care insurance (LTCI) is not a new one, the passage and eventual implementation of the Deficit Reduction Act of 2005 (DRA) makes it more difficult to gain Medicaid coverage and more important than ever to consider LTCI. In fact, my colleague Harley Gordon would argue that for an estate or financial planner not to recommend LTCI could be considered malpractice.

    Whether or not Harley is correct or committing hyperbole, it’s a good idea to recommend that clients consider LTCI. The more difficult question is whether to go further and recommend that clients purchase policies.

    Without getting into the choices among policies and carriers, which are far beyond my expertise, the challenge of determining who should purchase LTCI survives passage of the DRA. Here are some of the issues to consider.


    The client must be able to afford the policy now and for the rest of her life. But what does this mean? Must she be able to pay for the policy out of disposable income, or should she accept using savings and investments to pay the premiums?

    On this issue, I defer to financial planners, who should be able to provide clients with projections of their future income and expenses, with and without the need for long-term care.

    Insurance companies definitely hurt themselves in regard to the long-term affordability of LTCI premiums with their refusal to guarantee premiums, making it impossible to be certain about any projections of future costs.

Extent of Coverage

    Ideally, any policy purchased post-DRA should provide five years of coverage and totally cover the cost of care today, with a compound inflation rider to cover future increases in such costs. However, most clients cannot afford such premium coverage.  In that case, the question is whether the client should purchase a shorter coverage period but maintain higher daily benefit, or the opposite, a longer coverage period with a smaller daily benefit.  There are two schools of thought on this.

    One approach is to think of LTCI  as “avoid nursing home” insurance. In that case, the policy, with other income, need only cover the cost of assisted living care. This is the more benevolent alternative to nursing home care.  Under this approach, the client would opt for a longer-term policy with a smaller daily benefit to cover the care at home or in assisted living as an alternative to moving to a nursing home.

    The other school of thought is that the really bankrupting cost is nursing home care or around-the-clock home care and this is what the insurance should cover.  Proponents of this approach point out that it gives clients the best of both worlds because benefits not used for lower-cost care are not lost.  For example, a policyholder with two years of coverage at $200 a day, may only need $100 a day to pay for assistance at home.  For every day she draws on the policy, she doesn’t use up a day of the two years of coverage, but instead $100 of the overall pool of funds available to her of $146,000 ($200 x 365 x 2).


    At what age should individuals purchase LTCI? On the one hand, the younger you purchase your policy, the lower your premiums will be.  On the other hand, a 50-year-old today is unlikely to need long-term care for at least 30 years, and it’s impossible to know what long-term care options will be available then – or whether the medical profession will have found a cure to Alzheimer’s disease and other chronic ailments of the elderly.

    Yet, an argument against delay is the risk of uninsurability due to physical condition increases with age. Fee-only financial planner Jack Turgel has attempted to obtain the rates at which applications for LTCI are declined.  He reports:

    “...the figure I received from the Health Insurance Association showed an average 25% decline...unfortunately they did not break it out by decades, i.e. 50-60, 60-70 fact no one either had these figures or was willing to divulge them...”

    I tend to think of this more in terms of functional age than of chronological age.  If you are raising children or paying for their education, their support must be your primary concern and you should only consider purchasing LTCI if you have sufficient life and disability insurance, and can still afford to pay additional insurance premiums.  But once your children are supporting themselves, or if you have no children, then it makes sense to divert some insurance premium dollars from life insurance to LTCI.

Family History

    A final consideration is family history.  Have your parents or grandparents suffered from Alzheimer’s or Parkinson’s disease or another chronic illness?  Or have they lived into their 90s in perfect health with their faculties fully intact? Depending on your answer, it is more or less imperative that you purchase LTCI.

    As you can see, everyone should consider purchasing LTCI, but the actual decision is far from easy.

    C.    MassHealth

    Those who do not have LTCI for whatever reason either have to pay for their care out of pocket or qualify for Medicaid (MassHealth in Massachusetts) coverage of nursing home care. In passing the Deficit Reduction Act of 2005 (the “DRA”), Congress rewrote the rules governing eligibility, the three biggest changes having to do with penalties for transferring assets, the amount of equity in the home that may be protected, and how annuities are treated.


    MassHealth pays for the care of nursing home residents whose countable assets are below limits set by the state, which in Massachusetts is $2,000 for the nursing home resident and $109,560 for his or her spouse, if any.

    MassHealth has always had rules limiting the ability of nursing home residents to give away their assets to get themselves under the limits for MassHealth eligibility.  Such transfers (unless made to certain exempt recipients) cause a period of ineligibility based on each state’s average private-pay cost of nursing home care. In Massachusetts, for instance, the penalty is one month of ineligibility for every $8,120 given away. A gift of $81,000, for example, causes 10 months of ineligibility for benefits.

    This rule was in place before passage of the DRA and was not affected by the DRA. The DRA instead changes what transfers must be reported on an application for benefits and when the penalty period begins. Under prior law, an applicant for MassHealth had to report all transfers made to individuals during the three years prior the date the application is filed and all transfers to trusts made five years prior to that date. This in effect capped the penalty period for transfers to individuals to three years and transfers to trusts to five years.

    Under the DRA, this so-called “lookback” period is extended to five years for all 
transfers. The DRA only applies to transfers made on or after its date of enactment—February 8, 2006. So any transfers to individuals made before that date should still be subject to only a three-year reporting requirement.

    The more significant change to the transfer rules effected by the DRA has to do with the start date of the penalty period. For transfers made before February 8, 2006, the penalty period began on the first day of the month in which the transfer. For instance, a transfer of $81,000 on January 15, 2006 caused 10 months of ineligibility beginning January 1, 2006 and ending October 31, 2006.

    In contrast, under the DRA, the penalty period does not begin until several conditions have been met:

    1.    The person making the gift must be in a nursing home.
    2.    He or she must have spent down to the state’s countable asset limit ($2,000 in Massachusetts).
    3.    He or she must be deemed otherwise eligible for MassHealth if it were not for the gift. While this needs to be clarified, this seems to require that the nursing home resident actually apply for MassHealth and be rejected in order for the transfer penalty to begin.
    An example should help explain how this works.  Let’s assume the following scenario:

    1.    On July 1, 2006, Mr. Green transfers $81,000 to his children.
    2.    On July 1, 2007, Mr. Green moves to a nursing home.
    3.    On July 1, 2008, Mr. Green runs out of other funds.

    Under the pre-DRA rules, Mr. Green would have been ineligible for benefits due to his gift for 10 months beginning July 1, 2006, and ending April 30, 2007, before he even entered the nursing home. Under the DRA rules, the penalty period will not begin until July 1, 2008. How he will actually pay the facility during the subsequent 10 months is anyone’s guess.

    The Massachusetts Office of Medicaid has added a fourth requirement to the DRA rules—that in order to be eligible for MassHealth coverage for the penalty period to begin running, the nursing home must not be paid. If anyone is paying the nursing home, then the penalty period will not begin. The result appears to be that the only way to begin a penalty period for a transfer of assets is to “stiff” the nursing home.  

    The bottom line is that anyone transferring assets should assume that he will not be eligible for MassHealth for the following five years.

Home Equity

    In most states, including Massachusetts, prior to passage of the DRA, a nursing home resident’s home was not counted against his or her asset limit for MassHealth eligibility no matter its value. It could still be subject to claim for reimbursement by the state at the owner’s death, but would not interfere with qualifying for MassHealth coverage during life.

    Under the DRA, Congress set a limit on excluding the home as a countable asset to $500,000 of home equity while giving the states the option of increasing this limit to $750,000, an option which Massachusetts has elected. This limit does not apply if a spouse, minor child, or disabled child of the nursing home limit is living in the house.  In short, it only applies, in most cases, to unmarried nursing home residents.

    But for them it can be a huge problem. Take, for instance, an nursing home resident who owns a home with a fair market value of $800,000. In that case, the nursing home resident will have a $50,000 countable asset and will be ineligible for MassHealth coverage of her care.  What can she do?  Here are a few possibilities:

    1.    Sell the house and spend down the proceeds.
    2.    Borrow $50,000 on the house to reduce its equity to $750,000. This may be done through a traditional bank loan or with a family member or friend.
    3.    Argue that the valuation is wrong. Massachusetts will accept a tax valuation. It may be possible to present a lower appraisal if the market price is lower than the tax assessment.
    4.    Work out a deal with the nursing home – in effect a loan – where the facility will provide $50,000 of care in exchange for a mortgage on the property.

    In most instances, deferred or variable annuities are considered countable assets in the MassHealth planning context. However, immediate annuities are not. Immediate annuities are simply contracts with insurance companies wherein the annuitant pays a certain sum to the company in exchange for a promise from the company that it will pay back a fixed monthly amount. 

    Such payments may be for the life of the annuitant, for a specific number of years, or a combination of the two – for life, but with the guarantee of a certain number of years of payment even if the annuitant dies prematurely.  

    The purchase of immediate annuities or the conversion of deferred annuities to immediate annuities has not been considered a transfer of assets for MassHealth eligibility purposes if they met certain requirements. They have long been used to shelter assets for spouses of nursing home residents and, in some instances, for single individuals.

    Let’s take the example of a couple with $200,000 of countable assets where the husband moves to a nursing home. The wife could take $100,000 and convert it to an immediate annuity guaranteeing her a lifetime income stream and her husband could immediately qualify for MassHealth coverage.

    In the case of a single individual in a nursing home with $100,000 in countable assets, he could also convert this into an income stream with a guaranteed payment of, for instance, five years. The monthly payments would have to be paid towards his cost of care, but if he died before the expiration of the five-year term, the balance of payments would go to his children (or whoever else he named to receive them).

    In perhaps the most confusing part of the DRA, Congress added a requirement that such guaranteed annuity payments go to the state to reimburse it for costs of care paid on behalf of the annuitant. After the state is reimbursed, any remaining payments could go to family members.

    This new rule eliminated the use of immediate annuities for single nursing home residents in most cases, but not for healthy community spouses, since the reimbursement requirement is only for cost of the annuitant’s care. In the example above where the community spouse purchased an immediate annuity for her own benefit, the state only had to be named a remainder beneficiary for MassHealth paid on her behalf should she eventually require nursing home care.  The annuity still protects her financial well-being.

    At least that’s the current practice. The Office of Medicaid could require repayment for the nursing home spouse’s care as well at any time, since federal law now requires such reimbursement up to the amount of MassHealth benefits paid on behalf of the nursing home spouse.  It will still probably make sense for community spouses to use annuities in long-term care planning, but they run the risk of dying before they have received very many payments and the balance of the payments go to the state.  
Steps to Take in Light of the DRA

    While everyone’s situation is different and calls for its unique plan, here are some planning steps to consider:

    1.    Purchase long-term care insurance to take yourself out of questions about MassHealth coverage all together.
    2.    Purchase life insurance through an irrevocable trust. This will be protected for MassHealth purposes and ensure that an inheritance goes to your children. Then you can feel comfortable spending down your savings and home equity on your care when and if needed.
    3.    Put your home in an irrevocable trust, especially if its equity exceeds the state limit. This will permit qualification for MassHealth and protect the home from estate recovery at your death. If you do not have enough other resources to pay for care during the resulting five-year penalty period, purchase long-term care insurance to cover the period at which you are at risk. At the end of five years, you can reassess whether to keep the policy. (If you can’t afford the premiums for those five years either talk to your children about helping out – after all, who is getting the benefit of this planning?)
    4.    Consult with an elder law attorney to figure out a plan that works for you. This outline can only scratch the surface of the planning options available, since everyone’s situation and priorities are different.
Case History

    The following case history outlines the plan we would recommend for some not atypical clients:

    Christopher and Janet are in their early 70s, in good health and enjoying their retirement. They retired to the Cape. But all of their children and grandchildren now live in the midwest, having followed career opportunities and spouses.

    Financially, Christopher and Janet are comfortable, but don’t have a lot of funds to spare. Their home has a fair market value of approximately $700,000. They have savings and investments of approximately $400,000, which is made up primarily of Christopher’s roll-over IRA worth about $300,000 now.

    Christopher and Janet receive an annual income of about $60,000, including their Social Security, Christopher’s pension, minimum required distributions from their IRAs, and investment income. This meets their needs, but with little left over for extras such as long-term care insurance premiums. So, they came to see us about long-term care planning.

    Since their principal asset is their home, we asked Christopher and Janet about their plans. At this point, they plan to stay in their home, which they love. But they assume that if either of them became ill or passed away, they would move to be nearer their children. This would also permit to use some of the equity in their home for their living expenses and care costs.  

    Given these plans, an irrevocable trust for the home did not make sense in this case. While it would protect Christopher and Janet’s major asset, it would do that at the cost of making the equity unavailable to them. So we discussed the actual risk to their assets.  While these are difficult to quantify, they can be ranked as follows:

Most likely        Neither requires long-term care        No cost
Medium likelihood    One requires long-term care            High cost
Least likely        Both require long-term care            Huge cost

    As they could see, the most likely result is also the best – neither needs long-term care.  And the least likely result is the worst on all levels – both need long-term care. Under the new Medicaid rules, its also harder than ever to protect assets if both spouses require nursing home care. As a result, if that were to occur, Christopher and Janet could end up spending most or all of their savings, including their home equity, on their care.  But the best protections were already rejected – that is, long-term care insurance or an irrevocable trust for their home. They must either reconsider these options or take their chances.

    More likely, either Christopher or Janet will require long-term care, but not the other. This can occur either while the other spouse is alive and well or after he or she has passed away.  In the first instance, Medicaid law provides substantial protections for the healthy spouse. She can keep her home plus a bit more than $100,000 in savings. In addition, she can protect savings in excess of $100,000 through appropriate spending or the purchase of certain annuities, about which we would advise if worse came to worst.

    But these savings for the healthy spouse disappear if a widow or widower is in a nursing home.  In that case, approximately half of Christopher and Janet’s estate would likely be spent on their care, with the other half transferred to their children.  This cost could be protected against through long-term care insurance or an irrevocable trust for the house, but, again, these two options were rejected for the reasons given above.

    Fortunately, Medicaid law does permit one more planning step that could protect a large part of Christopher and Janet’s estate if one were to pass away and the other were to require nursing home care, but they must take this step while they are both alive and competent.  Medicaid permits spouses to create safe harbors for their spouses through their wills in the form of a “testamentary” trust.  

    A testamentary trust is a trust created in a will. For it to be funded, the estate of the first spouse to pass away must go through probate, which most estate planning strives to avoid.  However, the cost of probate is small when compared to the protections created by this safe harbor. Under this plan, the estate of the first spouse to pass away goes into trust for the surviving spouse. The terms of the trust give the trustee – usually one or more of the clients’ children – complete discretion to spend money for the surviving spouse, and those funds will not be counted in determining his or her eligibility for Medicaid coverage.

    The steps that need to be taken now to make this possible are for Christopher and Janet to execute new wills creating testamentary trusts for the survivor and to change the ownership of their home from tenancy by the entirety (under which it would pass to the surviving spouse) to tenants in common (under which each spouse owns half, with that half going to his or her probate estate and thus into the testamentary trust).  

    Given their plans, Christopher and Janet had a final question. Would this plan work if the surviving spouse moved out of state, which is likely. The answer is yes, the provision providing for the testamentary trust safe harbor is in federal law (though, of course, we cannot control future changes in the law). Given that this plan is much less expensive than long-term care insurance and does not tie up their property as an irrevocable trust would, Christopher and Janet opted for the testamentary trusts.

IV.       Protecting Future Generations

    A.    The Risk

    Increasingly parents are taking steps through their estate planning to protect their children and grandchildren from financial risks of life, whether self-created or coming from bad luck.  These can include any of the following:

    •    Divorce
    •    Death of a child so that property goes to the spouse rather than the grandchildren
    •    Bad spending decisions by the child or his or her spouse
    •    Bad investment decisions by the child or the spouse
    •    Disability through accident or illness which requires qualification for public benefits
    •    Bankruptcy
    •    Lawsuits
    •    Estate taxes. For those parents and children who have larger estates, funds can be subject to double taxation, first at the parent’s death and then a second time at the child’s death. With current estate tax rates, without proper planning, less than 20 percent may pass to the grandchildren.
    Unfortunately, it’s an increasingly expensive and financially dangerous world. With the decreased benefit of fixed pensions for workers, and often the loss of such pensions due to the bankruptcies of the employers, today’s workers must depend more on their own savings, which are increasingly at risk.

    B.       Family Protection Trusts

    Fortunately, parents can protect the inheritance they leave their children and grandchildren by leaving them in trust rather than outright to their children. American law has long permitted parents and grandparents to leave funds in so-called “spendthrift” trusts to protect them from the spendthrift habits of their offspring. While individuals in most instances cannot create trusts for their own benefit and still protect the funds from their creditors, a third party can do so. And such trusts also will provide protection from the other risks listed above.

    However, there are trade offs—the principal one being lack of control. The child cannot control the distributions from the trust and still get the protection the trusts are designed to provide. However, the child may be given some aspects of control over the trust and still maintain some protection. The amount of protection is somewhat uncertain based on some recent cases attacking asset protection trusts. And each state’s law is somewhat different.  Simply keep in mind that the less control the child has, the more ironclad the protection will be.

    Following is a list of choices to be made in drafting each “family protection” trust:

Choice of Trustee

    Ideally, family protection trusts have an independent trustee with discretion to make or withhold distributions to the beneficiaries. However, clients often object to the cost and lack of control involved in turning trust assets over to a professional trustee. It is possible for a child to be trustee of his own family protection trust. But he must follow the terms of the trust assiduously and resign as trustee if he sees the possible occurrence of any of the unfortunate events listed above.  

    The problem is that family trustees often do not follow the terms laid out in the trust instrument and even if they do, the trusts may offer less protection than they would if administered by a completely independent trustee. These are trade offs the client and attorney must discuss in preparing the trust. Even with the child as trustee, the trust will offer more protection than would a direct inheritance.

Income Distributions

    While the child cannot control principal distributions, the trust can provide that all income be distributed to the child, that income distributions are discretionary to the trustee, or that income distributions may be controlled by the child.

Other Beneficiaries

    While any distributions of principal must be discretionary, it provides even further protection if the trustee has discretion to make distributions to others, such as the child’s offspring and spouse.

Withdrawal Rights

    Beneficiaries of trusts are often given the right to withdraw up to 5 percent of trust principal a year because this is a safe harbor that does not give them ownership for tax purposes.  However, for asset protection purposes, it is better that the beneficiary not have this right.

Right to Change Trustees

    While we generally draft trusts to give beneficiaries the right to hire and fire independent trustees, this can be construed as giving the beneficiary control over the trust.  The protections provided by the trust will be more ironclad if the beneficiaries do not have the power to change trustees or if, at least, that power is shared with others, such as their siblings and children.

    In short, the choices to be made in drafting a family protection provide a spectrum of trade offs between protection and control for the child with the protection increasing as control decreases. Each client must make his or her decision, perhaps in consultation with children, where they should land on the family protection spectrum.

Other Drafting Issues

    Family protection trusts may be drafted differently depending on their primary purpose – asset protection in the event of lawsuit, keeping the funds in the family line, or avoiding repeated taxation. Depending on the purpose or purposes, the beneficiary may have more or less access to the trust funds. She may have a right to income. Distributions may be limited to health, education, maintenance or support, or made for any reason. 

    The grantor may want to create an incentive trust – permitting distributions of principal if the beneficiary achieves certain goals. The grantor may or may not want to include grandchildren as beneficiaries while the children are alive. Children may or may not be given powers of appointment to determine who receives the trust assets upon each child’s death. The trust may be drafted to minimize IRA withdrawals and protect IRAs from creditors.

    In short, there are many ways to tailor a family protection trust according to the client’s situation and goals.

    Due to their own life experiences, seniors are more apt than younger clients to take advantage of the opportunity to protect what they leave behind for future generations. Some may object that they should not control their children and grandchildren from the grave. But that is not necessarily what this is about. Instead it is an opportunity to take advantage of trust law to leave a lasting legacy. All clients should be given this opportunity.

V.     Conclusion

    Asset protection planning is especially important to seniors because very few have the option of going back to work and earning again whatever they may lose.  The biggest threat to the financial security of most seniors is the possibility of disability and the need for long-term care. The possibility of needing care shoots up after age 85.  

    Planning for this risk is vital to any retirement plan. It can provided for from savings and earnings, long-term care insurance, MassHealth, or some combination of the three. To take the best advantage of any of these sources of coverage, seniors need to plan ahead, both financially and making sure that they have the correct estate planning documents in place.  Further, seniors have the opportunity through family protection trusts to protect their children and grandchildren from this and other risks to their assets.

Harry S. Margolis is managing partner of Margolis & Bloom, LLP, a law firm with offices in Boston, Norwood, and Wellesley. He's a so-called Super Lawyer, and founder of ElderLawAnswers—a consortium of 600 law firms nationwide serving clients directly and consumers through their website at

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