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
Another scenario for the Parental Protection Trust allows children to fund the trust with ample assets to purchase a life insurance policy with a long-term care rider on the parents. This of course assumes that the parents are young and healthy enough to be insurable. This is typically an option only for more affluent clients and families.
The life insurance policy in this case would have to be a specific type of policy that provides an indemnity benefit, and not a reimbursement benefit for that long-term care benefit. Therefore, if the parents do meet the requirements for a long-term care rider the indemnity payment comes into the trust.
It just provides more assets that are then available for the kids to be able to use for their parents’ care,” says Brian Albee. “And then at the parents’ death, (what remains of the life insurance) pays into the trust the life insurance benefits, and again, that money comes back out to the kids at the parents’ death. It’s a nice technique if you couple it with Medicaid Asset Protection Trust.”
In this case Albee says that instead of gifting directly to the kids, parents could set up a Medicaid Asset Protection Trust and put funds into that. As lifetime beneficiaries, the children could subsequently withdraw funds and set up a Parental Protection Trust for the parents and get the life insurance policy with a long-term care rider.
By doing this Albee says, “You end up with a pretty decent plan for making sure there’s funds available for the parents’ care when the time comes.”
Again, this type of trust requires that the client is fairly affluent, young and healthy enough to be insurable through a policy with a long-term care rider. It also requires that the parent/child relationship is one in which there is a mutual level of trust. If your client meets those criteria then the Parental Protection Trust can be a great option.
If you’d like more information or resources on all types of asset protection trusts, contact WealthCounsel today.
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