Grantor Trusts can be a source of confusion for elder law attorneys and their clients alike. That’s because they are not a typical type of trust. The biggest difference to note about a Grantor Trust is that it is about how the trust’s income is taxed rather than who receives the income or assets of the trust.

In short, a Grantor Trust is a trust in which the grantor, or the originator of the trust, retains control over the trust. Therefore, the income is included in the income of the deemed owner (usually the grantor) rather than the trust or any other person. This distinction places Grantor Trusts into the "revocable" living trust category. The goal of establishing a Grantor Trust is to tax someone other than the recipient on the income that is generated by the trust.

Parental Protection Trusts are an option for your elder law clients in cases where traditional irrevocable asset protection trust planning isn’t an option and the best option is to divest themselves of assets by giving them away — usually to children. The children can then use those assets to establish a Parental Protection Trust. Essentially, this type of trust is a third-party special needs planning tactic that is established for the parent’s benefit, with the client’s children being the third party.

When children establish a Parental Protection Trust, it allows them to donate whatever funds they wish into that trust to be set aside for the benefit of the parents. Assets are put into the trust and those funds are preserved until the parent’s death. At that time, any remaining assets are distributed back to the children.

How a life insurance policy fits in

The Veterans Asset Protection Trust can be a beneficial option for many of your elder law clients that are looking for long-term planning options. The Veterans Asset Protection Trust is an intentionally defective grantor trust and can be considered as an option for clients who are wartime Veterans or the surviving spouses of a wartime Veteran. This trust is designed to meet the eligibility requirements from the Veterans Administration (VA) of a complete gift or complete relinquishment.  

When it comes to assets, the most significant for Veterans is typically his or her residence. As long as a Veteran retains that home, it does not count as part of his or her net worth for VA-eligibility purposes and instead qualifies as a “non-countable resource.” If a Veteran is collecting a monthly pension benefit, however, and later sells the home, those proceeds will disqualify him or her from receiving any further Veterans’ pension benefits. This disqualification remains intact until the Veteran spends the proceeds down to an allowable asset level.