Asset Protection Trust in Veterans Benefits Planning

8eBenefits.VA.Gov – An Asset Protection Trust (“APT”) is an Intentionally Defective Grantor Trust. An Intentionally Defective Grantor Trust is a trust that treats the assets in the trust differently for income tax purposes than for estate tax and gift tax purposes. The veteran will be the grantor, but not a beneficiary. The trust utilizes Internal Revenue Code § 671-677 which afford differential tax treatment for income tax purposes.

For most veterans their major asset is their residence. As long as the veteran retains the home it is not part of his or her net worth for Veterans Administration (“VA”) eligibility purposes; it is a “non-countable resource.” However, if the veteran qualifies for the monthly pension benefit and later sells the home the proceeds will disqualify the veteran from receiving any further Veterans pension benefits – until the veteran spends down to an allowable asset level.

However, if the residence was placed in the trust prior to the VA application and later sold by the trustee the sale proceeds would not jeopardize the veteran’s pension benefits. Additionally, if the veteran needs Medicaid benefits more than five years following the date the trust was established and funded (the later of the two events) the trust corpus will not be part of the veteran’s Medicaid application. eBenefits.VA.Gov

The veteran will be the grantor of the trust and the veteran’s children will be the beneficiaries. The trust agreement provides rights and duties of the trustee so that the trustee can make discretionary distributions to the beneficiaries. Also, it is recommended that the trust agreement provide for a trust protector who has an absolute power to remove and replace the trustee who is not acting in the best interest of the trust’s purpose. By establishing the trust the veteran can have more control over how the assets in the trust are going to be distributed and used, although the veteran has no legal right to the trust’s corpus.

Some advantages of Intentionally Defective Grantor Trusts include:

The trust can hold and sell a veteran’s residence and keep the proceeds. The proceeds will not disqualify the veteran for pension benefits or Medicaid during the lifetime of the veteran;
The proceeds from the sale of the residence will not be subject to estate recovery by Medicaid;
The trustee can sell the residence with the grantor still being able to take advantage of Internal Revenue Code § 121 – capital gain exemption up to $250,000;
At the death of the grantor, the trust assets will receive a stepped-up basis for income tax purposes; and
It will keep the assets out of the hands of irresponsible children.

Dale M. Krause, J.D., LL.M., has provided Medicaid Compliant Annuities to elder law attorneys, and their clients, throughout the United States. As a result of his practice, Mr. Krause has been labeled “The Pioneer of Medicaid Compliant Annuities.”