A Family Protection Trust (FPT) is a legal method allowing you to segregate your assets from taxation, cost of care fees, and other risks to your estate. Also known as an asset protection trust, inheritance tax protection trust, or home protection trust, a family protection trust protects family wealth from outside risks.  The beneficiaries of a family trust are most generally related such as children, grandchildren, or other loved ones.  The assets funding the trust may include family-owned businesses, homes, farms, life insurance, and “rainy day” savings.   as well as other family trusts.  

*This blog is for educational purposes only and should not be considered legal advice. The use of the Paths Law Firm website does not constitute a client-lawyer relationship.

In simple terms, a family protection trust can be thought of as a safety deposit box holding ownership of a family’s property and assets.  This includes things such as a family business, a home, life insurance, stocks, savings, bonds, other trusts, and any other assets you want to keep safe.  While the assets are in a family trust, they can be accessed if the trust is designed appropriately.  This allows assets to be added to the trust, assets in the trust can be sold, and the trustee can even borrow against assets in the trust.  Beneficiaries can even receive the assets anytime depending on the family’s desires.

What is the Purpose of a Family Protection Trust?

A Family Trust is an inter vivos discretionary trust.  This means that the trust is established by an individual during their life and may be referred to as a living trust.  The trust is best for managing select assets to support the designated beneficiaries.  The primary purpose of a family protection trust is to protect the chosen assets and property placed in the trust.  The individuals named as the trustees hold the assets on behalf of the beneficiaries designated on the trust.  All assets, including money and property, placed in the trust are segregated from your estate and protected from many of the risks possibly affecting the estate.

Should Everyone Have a Family Protection Trust?

There are pros and cons of having a Family protection trust.  Whether or not having this type of trust is good for you and your family depends on the type of assets making up the estate and the family dynamics. 

The funds in an FPT are kept in an account separate from an individual’s name or estate.  Because of this separation, the trust may need to file a tax return.  The tax aspects of these trusts can be better explained by a tax professional.  Most attorneys who help draft these types of trusts should make it easy to understand the tax aspects.  The protections of the trust are only valid if the family follows the trust rules.  The assets in the trust should be spent last in order for the trust to provide the most benefit.  If the trust funds are not needed immediately, the trust can provide considerable protection.  Before setting up a Family Protection Trust it is important to get legal counsel to discuss the pros and cons as it relates to your specific situation. 

What Events or Factors Can Cause Loss to an Estate?

There are many factors impacting the assets of an individual’s estate causing a reduction in the money and property meant to be passed on to family members and loved ones including:

• Taxes, specifically inheritance tax.
• Cost of care for long-term-nursing home services.
• Claims made against an estate by a family member left out of a will.
• Disinheritance, whereupon death, your spouse remarries and passes your property to their new spouse and their family, excluding your children.
• Costs Associated with Probate.
• If assets are left to your children as a gift, the funds can be exposed to their divorce, lawsuits, or bankruptcy.

How Can I Protect My Estate to Reduce Risks?

Reducing the risks to your estate allows you to have more available later for care or to pass on more to your family.  Setting up a family protection trust can help mitigate risks.  This is a good option for individuals wanting to ensure their spouse can continue living in their family home, with the knowledge the estate will at some point, be passed to their children or other beneficiaries of choice.  There are many different types of trusts available to protect your assets however, the best trust depends on your estate.  For information on estate planning and asset protection options, contact Paths Elder Law to schedule a consultation.

What Are the Pros and Cons of a Family Protection Trust?

Setting up a family trust is a difficult decision as there are many things to consider.  Part of the decision should weigh the pros and cons and how they will impact the goals for your estate. 

Pros of a Family Protection Trust

A family protection trust has many benefits to protect and manage assets and how those assets are inherited.  The following are some of the pros of setting up a family trust:

• Ensures assets are kept in the family – When a child dies, the funds in a family protection trust will stay in the family for the benefit of grandchildren. This is an important consideration as it protects children in the event a surviving spouse decides to remarry.
• Provides management of assets (protecting vulnerable family members) – A family trust can help to protect a vulnerable beneficiary who makes bad spending decisions or is at risk of another person encouraging them to make bad spending decisions.  Some individuals can manage finances better than others and a family protection trust can be used to ensure the assets left to them are well-managed for their benefit.
• Bankruptcy protection – If a son or daughter has financial issues and needs to file bankruptcy, the family protection trust should be designed so assets titled in the trust are protected.  This is because the assets of the trust do not legally belong to the beneficiary.  They can be used for the beneficiary, but the terms of the trust and the discretion of the trustee places needed barriers in the way from being considered as owned by the beneficiary.  The funds are still available to them, but creditors are not able to make a claim against the trust.

• Divorce protection – For similar reasons as explained above, funds in a family protection trust are more protected in the event of divorce than funds in a beneficiary’s name. Whether or not the protection is absolute will depend on the state laws and how funds are used; however, funds in a family trust are more likely to be excluded in a divorce settlement.
• Lawsuit protection – If the beneficiary of a family trust is sued, funds in the trust should be protected from judgments.
• Medicaid benefits – Although a family protection trust is different from a special needs trust, it can be set up so funds in the trust are not required to be spent down in the event of disability and the need for Medicaid benefits. This can also apply when a child becomes elderly and needs Medicaid coverage for long-term care nursing home benefits.  This can even be used now for older parents.
• Avoids double taxation – Funds in a family protection trust are not included in the taxable estate of a child. While this may not apply for most people in relation to the 2021 federal estate tax threshold, which is currently set at $11.7 million, the state in which you reside may have a lower threshold than the federal threshold.  This means many estates would be subject to additional taxation.
• Flexibility to adjust for changes in the law – Modern trust deeds generally have limitations on rights of variations when it comes to dealing with changes in the law.
• Confidentiality – Family trusts are confidential because they are not publicly registered.

Cons of a Family Protection Trust

Family protection trusts have many pros, and some cons should be considered.  The following are some of the cons of setting up a family protection trust:

• Cost – The fees associated with preparing a plan including a family protection trust is usually more than a plan without one.  It’s not common and many attorneys try to avoid the need for a professional trustee, but if one is appointed, there are fees associated with using them.  If the family protection trust is being used for an older parent, hopefully, there are great individual choices available to use as the trustee.
• Tax returns – Once a family protection trust is funded, the trust may need to file its tax returns. Typically, the trust does not pay taxes and the returns are for reporting purposes only.  Designed properly, the person with the lowest tax base will be recognizing the trust income on their tax returns.  The trust funds can be used to help pay any additional taxes.
• Following the rules – While a professional trustee may be most familiar with a fiduciary’s duties, most individuals choose to name their children as the trustees of their trusts. This does save on the cost of a professional trustee.  With proper counsel and careful review of the trust, there is little risk a child may run afoul of their duties. 

Be Aware of the Medicaid 5-Year Look Back Period

One of the benefits, as mentioned above, of a Family Protection Trust, is protection of assets in the event a beneficiary needs Medicaid for long-term care or nursing home expenses.  It is important to have an understanding of the rules associated with Medicaid’s 5-year look back period in regard to this type of trust.  Simply stated, Medicaid can look back 5 years in their financial analysis to make a determination of whether an individual qualifies for nursing-home Medicaid benefits. 

The law allowing a 5-year look back also required the transfer was for the purpose of qualifying for Medicaid.  If the trust is funded during a period with no or minimal diagnosis that should lead to the nursing home, a strong argument may be only because of an intervening event (such as a car accident) are they in the nursing home within the 5 years.  It is more certain the plan will work if you have the 5 years, but if not, all is not lost.

If we only consider the 5 years and not the exceptions, this means for the trust plan to work best, it should be set up and funded at least 5 years before Medicaid is needed.  After the 5-year period has passed, the assets in the trust are no longer countable assets.  In fact, if done correctly, Medicaid legally does not even know any of the transfers occurred. 

Should someone need nursing home care within the 5 years, this trust also provides a deadline for privately paying for long-term care costs.  It is important Medicaid is not requested within the 5 years as a penalty period will be assessed and the penalty period is not limited by the 5 years.  The length of time for the penalty period is based on the amount of assets transferred within the 5 years.

Final Thoughts

While the decision to create a Family Protection Trust is different for each person, this type of trust helps safeguard assets and protect legacies from unexpected circumstances that may occur in the future.  At Paths Elder Law we understand the importance of protecting your future and the future of your family for generations to come.  We have close to 30 years of experience setting up wills and trusts, asset protection, nursing home Medicaid,  VA and other benefits, probate, and guardianship.

We have been extremely successful in helping our clients protect their legacy and mitigating issues related to the cost of care, and more.  If you would like more information or resources on how we can help, contact Paths Elder Law.  Bringing you one step closer to the peace of mind you want and need.