Irrevocable Safe Harbor Or Not?
My father, in his late 80s, is considering marrying a lady who is not in the best physical health. I own property with him together, what implications are there when you place property into a safe harbor trust?
Medicaid Benefits Qualification Rule
Is property conveyed by a single person to a safe harbor trust subject to the five year transfer penalty for purposes of qualifying for Medicaid coverage? If so, what are the advantages of a safe harbor trust as compared to simply gifting the estate property?
For a single person the act of transferring property is what starts the five year penalty. Which makes the owner of the property the wrong individual to create the trust unless the trust will name someone other than the transferor as the beneficiary. For those who want to remove assets out of their own estates for asset protection purposes would need to first gift the assets out of the estate to someone they trust; it is that transferee who will then create the safe harbor trust and place the gifted assets in the trust (subject to planning around a concept in law referred to as the step-transaction theory). The purpose would be for the transferee to want to protect the assets from his/her own creditors for the benefit of the named beneficiary (hopefully the transferor) and from title XIX benefits (Medicaid benefits).
For example, a parent might gift a home to a child. The child could consider that unless he put the home in a trust it would be vulnerable to his creditors (accident claim creditors, divorcing spouse etc.) By creating a trust he would remove the asset out of his own estate and thereby be able to afford a level of protection in the home for the parent who gifted the home in the first place.
Alternatively, the parent could place the home in the safe harbor trust naming the child as the exclusive beneficiary. Clearly nothing would stop the child from allowing the parent to use the home even though it is not owned by the parent. Either way, the gift out of the parent’s name subjects the transfer to the five year rule.
Should I have Safe Harbor Trust ?
This was the question asked by one of the caller during my last week radio show Aging Options. This is a very common & good question, I get from my listeners & clients all the time. Answer to this question is if your estate is worth between 50k -1.5k million dollar, you should take a very good look at the Safe Harbor Trust. These are the estate where people have worked very hard all their life, they have said no to expensive vacations, no to brand new car every year. They have set aside money for the house that is paid for & few hundred thousand dollars in bank. These estates are now venerable to the Long Term Care cost, which is very expensive. Average cost can range anywhere between 8k - 15k per month.
Some of the exceptions to not being serious about Safe Harbor Trust is having a very very good Long Term Care Insurance Policy with life time paid benefits or if your estate is worth more than 1.5K million dollars. Here the issue is not the asset preservation but the care management. You should not ignore the importance of care management, if you are looking for dignity & quality of your life in retirement.
