Asset Protection Checklist: the Trust that Every Couple Must Have to Protect Each Other
If you are married, you must embrace the truth that one day either you or your spouse will be single. Statistically, the survivor among you is the wife. She will experience a decrease in household income immediately after her husband dies. Shortly, she will experience a decrease in her net worth. She also runs a much higher chance of spending time in a residential care community.
The relevant is law can be found at 42 USC § 1396p et seq. For this guide, we are only concerned with the following section: 42 U.S.C. § 1396p(d)(4)(A). This statute authorizes the creation of a trust that does not count as an asset when the beneficiary of the trust applies for medical benefits through the Medicaid program or one of its state waiver versions. The statute, however, requires that the trust hold assets that do not belong to the Medicaid applicant and, in the context of a trust for a surviving spouse, must be created by a court.
This can be achieved easily the will of the first spouse to die is admitted to probate. Probate is a court procedure to clear title of assets when the asset owner dies and to transfer title to a qualified heir. Even in states where the probate procedure is simplified, the probate process meets the requirements necessary for the trust to qualify under the federal statute. In plan English, the trust must be created by the will of the deceased spouse. This is called a "testamentary trust", which means that the trust is written into the will and signed by the will maker, i.e, the spouse who died first, but sits dormant, springing into existence when the will is admitted to probate. The term "testamentary" derives from the medieval "testament", which transferred title of personal property at death. A "will", on the other hand, transferred title of real property at death.
For our purposes and throughout the BoomX site, the term "Spousal Protection Trust" will be used to describe this trust. However, many attorneys describe it as a "testamentary supplemental needs trust".
The value of this trust is the protection of the assets in it from Medicaid spend-down and recovery liens. The dreaded transfer penalties of Medicaid law do not apply and the look-back period does not apply.
The surviving spouse is prohibited as trustee of this trust and it is highly recommended that the surviving spouse should be explicitly barred from acting the executor/ix of the estate of the deceased spouse. In federal law, a person who exercises any control, direct or indirect, is said to own the asset. This trust works well because the assets that fund the trust are the assets of the deceased spouse's estate. While the surviving may have had a property interest over the assets before death, that interest extinguishes upon death of the spouse as the marital community is severed. The surviving spouse should exercise care to avoid bring the assets back into her estate by any influence or control of the assets.
The trust may also act as a tax savings trust in some states that have a separate estate tax but decoupled from the federal estate tax system. These states allow a "credit". A great way to capture that credit is to fund a Spousal Protection Trust. In that case, the Spousal Protection Trust, if structured correctly, could act as a Medicaid asset protection trust and a credit shelter trust.
