One of the greatest tools available to estate planning and elder law attorneys is the irrevocable Wealth Preservation Trust.
If you are like me when I first heard about this type of trust, you are probably thinking “that sounds cool, what is it?”
Before we get into the nuts and bolts of what an irrevocable Wealth Preservation Trust is, let’s take a minute to go over who could most benefit from using a trust like this as part of their overall estate plan.
Who Should Consider Using a Wealth Preservation Trust?
If I’m meeting with a new potential client and they are asking about asset protection, whether from creditors, lawsuits, or even to help qualify for Medicaid, then a Wealth Preservation Trust is one of the first options we typically discuss.
How do you know if you would be a good candidate for a Wealth Preservation Trust?
Here is a list of questions for you to go through as you start to consider whether a wealth preservation trust is right for you.
- Have money that you want to protect?
- Have sufficient income such that you don’t need the money you are looking to protect?
- Think that you may need to pay for Long Term Care Expenses in the future due to your age or health?
- Want peace of mind knowing that no matter what happens to you or your health, your assets are protected?
If you can answer yes to at least two of these questions, you may be a good candidate for a wealth preservation trust.
Here’s a quick video explaining what a Wealth Preservation Trust is…
A Case Study Showing the Benefits of the Wealth Preservation Trust
Let’s take the case of Betty.
Betty is a 75-year-old widow. She is retired and in good shape, living an active lifestyle and playing tennis three times a week. She has a boyfriend she has been seeing for the past two years but has no plans to marry him.
Betty has two adult children, John and Maggie. In addition, she has lived in the same neighborhood for 40 years, so she has lots of friends who live close to her.
Betty’s home is worth approximately $350,000 (completely paid off) and she has liquid investments of approximately $750,000. She receives a pension and social security totaling approximately $3,000 per month, which she can live on without touching her investments.
Betty is interested in revising her estate plan to provide a small amount of money to her boyfriend and the remainder to her kids.
Would Betty be a good candidate for a Wealth Preservation Trust?
Going back to the questions above, Betty most certainly has assets to protect and she has sufficient income such that she does not need to use her investments to fund her lifestyle.
As Betty is 75 and in relatively good health, therefore she doesn’t perceive a need for long-term care expenses right now. Due to her age, however, she may not qualify for long-term care insurance to pay for those expenses should they become necessary (or if she did the insurance premiums may be cost prohibitive).
Betty would be an ideal candidate for a Wealth Preservation Trust.
Here’s what a Wealth Preservation Trust could do for Betty.
The Benefits of a Wealth Preservation Trust
The first and most important benefit is that if Betty were to get sick or injured, the current value of Betty’s assets would disqualify her from any benefits that she might otherwise be entitled to.
By using a Wealth Preservation Trust, Betty would receive the peace of mind knowing that her assets in the trust are protected, regardless of what happens to her health.
However, there are a couple of big things you need to know if you are interested in this type of planning.
First, any assets transferred into a Wealth Preservation Trust are subject to a 5 year look-back period. This means that if Betty needed long-term care within 5 years after transferring her assets into the trust, she would need to postpone applying for these benefits until after the 5 year look-back period is over. (There are ways to get around this if necessary, but given the number of assets Betty is looking to protect, that wouldn’t be needed in her case).
Second, you need to know that you are effectively relinquishing control over your assets to either a corporate trustee or an individual that you trust to look after you and provide for your needs. If Betty’s kids got along well, then it may be appropriate for them to be named as co-trustees. However, if they don’t get along then a corporate trustee may be required. What’s important to understand is that Betty, as the grantor of the trust, should NOT be named the trustee of this trust.
Tax Benefits of a Wealth Preservation Trust
Aside from the general peace of mind that Better would get by using a trust like this, there are other important tax benefits to using a trust like this.
To begin with, Betty’s heirs will receive a step-up in basis upon Betty’s passing of any assets contained in the trust. This is a huge benefit that cannot be understated.
In addition, all income and capital gains generated by the trust would be taxed at Betty’s individual tax rates, not the trust tax rates. And since the tax table for trusts tops out at 39.6% (2017 numbers) after the trust has earned a whopping $12,000 per year, this is another big benefit.
Finally, any real property exemptions and capital gains exclusions for the home would be preserved by using this type of trust.
To achieve these goals, the trust must be drafted in a special way. If an attorney who does not typically work with elder law clients drafts a typical irrevocable trust, it may not qualify for all the tax benefits outlined here.
Do You Need a Wealth Preservation Trust?
The bottom line is that if you have assets you wish to protect and if you are older and may need to pay for long-term care expenses in the next 5-10 years, then a Wealth Preservation Trust may be a great option for your estate planning needs.
If you have questions or would like to learn more about Wealth Preservation Trusts, please feel free to call our office at (919) 460-5422 or use this link to submit a contact form and schedule a quick phone conference with us.