When it comes to protecting assets and transferring wealth, many people believe giving property away is the simplest solution. Just sign over the house to the kids or transfer those investments to a loved one, and they're protected—right?
As an attorney with nearly 30 years of experience in estate and elder law planning, when it comes to asset protection, I can tell you that outright gifts often create more problems than they solve. The good news? There are strategic ways to give while maintaining protection and control.
In this article, I'll show you why traditional gifting falls short and how structured gifting through specialized trusts can provide the asset protection you need while achieving your wealth transfer goals.
Why Simply Giving Assets Away Often Backfires
Before exploring better solutions, let's understand why outright gifts can be problematic:
1. You Lose Control Forever
Once you give something away, it's gone. You have no legal right to:
- Decide how the asset is used
- Take it back if circumstances change
- Control what happens if the recipient divorces, dies, or faces financial problems
2. The Asset Becomes Vulnerable to the Recipient's Problems
Your carefully accumulated wealth can suddenly face risks from:
- Your child's divorce (with up to 50% potentially going to an ex-spouse)
- Creditor claims or lawsuits against the recipient
- Bankruptcy proceedings
- Poor financial decisions by the recipient
3. You May Create Unintended Tax Consequences
Outright gifts can trigger:
- Capital gains tax issues due to carryover basis rules
- Gift tax return filing requirements
- Loss of potential step-up in basis at death
Real-Life Examples: When Good Intentions Go Wrong
Let me share some real situations I've encountered (with names changed for privacy):
After 40 years of marriage, David and Susan gave their $450,000 vacation home to their son Michael, hoping to protect it from potential nursing home costs. Three years later, Michael went through a bitter divorce. Because the house was now in Michael's name, it became part of his marital estate. His ex-wife received a court judgment for $225,000—half the home's value—forcing the sale of the cherished family property.
Eleanor transferred her investment account worth $300,000 to her daughter Jennifer to "keep it in the family" if she needed long-term care. When Jennifer was later sued after a car accident, the entire account was exposed to the lawsuit judgment. The family lost nearly everything Eleanor had spent decades saving.
These stories illustrate why outright gifting, despite good intentions, often fails to provide the protection families seek.
The Long-Term Care Risk
For many older Americans, protecting assets from nursing home costs is a primary concern. While gifting assets might seem like a solution, it creates serious risks:
- Gifts within the 60-month Medicaid lookback period can create lengthy periods of ineligibility
- Once given away, those assets can't help you if your other resources run out
- You have no guarantee the recipient will use those assets for your care if needed
The Better Alternative: Protected Gifting Through Specialized Trusts
The good news is that you can give assets while maintaining protection through properly structured trusts. These arrangements create a "have your cake and eat it too" scenario that outright gifts simply can't match.
How Protected Gifting Works
Instead of giving assets directly to beneficiaries, you transfer them to a carefully structured trust with specific provisions that:
- Name your intended beneficiaries
- Establish terms for distributions
- Create protective barriers against creditors, divorcing spouses, and other threats
- Potentially provide tax advantages
- May offer long-term care planning benefits when structured properly and given enough time
Types of Asset Protection Trusts for Different Goals
Different situations call for different trust structures. Here are several options I commonly recommend to clients:
1. Irrevocable Asset Protection Trusts
These trusts can provide protection from both long-term care costs and other creditors when properly structured and funded early enough:
Robert and Patricia, both 67, transferred their $700,000 investment portfolio and vacation property to an irrevocable asset protection trust. They named their children as trustees and maintained the right to income from the assets. Seven years later, when Robert needed nursing home care, the trust assets were protected from Medicaid spend-down requirements because the five-year lookback period had passed.
Key Benefits:
- Assets can be protected from long-term care costs after the five-year lookback period
- Can provide income to you while protecting the principal
- Assets avoid probate at your death
- May provide tax planning advantages
Considerations:
- Requires giving up direct control of assets
- Must be established well before long-term care is needed (ideally 5+ years)
- Requires careful drafting to balance access and protection
2. Spousal Lifetime Access Trusts (SLATs)
For married couples with estates potentially subject to estate tax, SLATs offer a way to remove assets from your taxable estate while maintaining indirect access:
James, a successful business owner, transferred $6 million to a SLAT for the benefit of his wife Martha and their children. This removed the assets from his taxable estate while allowing Martha to receive distributions if needed. The trust protected the assets from both potential creditors and estate taxes.
Key Benefits:
- Removes assets from your taxable estate
- Spouse can access funds if needed
- Assets protected from creditors and divorcing spouses
- Can use current higher estate tax exemption before it sunsets in 2026
Considerations:
- Access depends on marriage remaining intact
- Requires careful drafting to avoid the "reciprocal trust doctrine"
- Complex tax considerations
3. Beneficiary Defective Inheritor's Trusts (BDITs)
This sophisticated strategy allows you to sell assets to a trust created by someone else (often a parent or other relative) for your benefit:
Elizabeth's father established a BDIT for her benefit with a small initial gift. Elizabeth then sold her growing technology business to the trust in exchange for a promissory note. The business continued growing inside the protective trust structure, shielded from potential creditors while providing Elizabeth with payments on the note.
Key Benefits:
- Protects assets from creditors and predators
- Can allow you to maintain significant control over assets
- Provides tax planning advantages
- Assets grow outside your taxable estate
Considerations:
- Complex structure requiring expert planning
- Needs proper "seed money" from another person
- Must be properly administered to maintain benefits
4. Domestic Asset Protection Trusts (DAPTs)
In states that allow them, these trusts can protect assets from creditors even when you're a beneficiary:
Richard, a physician concerned about malpractice exposure, transferred $1.2 million to a DAPT in a state with favorable asset protection laws. The trust provided a layer of protection from potential future claims while allowing distributions to Richard based on trustee discretion.
Key Benefits:
- May allow you to be a beneficiary of your own asset protection trust
- Can provide significant creditor protection
- Flexibility in design and distribution provisions
- May provide estate tax benefits
Considerations:
- Not available in all states
- Varying degrees of protection depending on state law
- Usually requires using an out-of-state trustee
- Generally less effective for pre-existing creditors
Finding the Right Balance: Control vs. Protection
The fundamental challenge in asset protection planning is balancing your desire for control with your need for protection. Generally speaking, the more control you maintain, the less protection you receive.
The Control-Protection Spectrum
Different trust structures offer different positions on this spectrum:
More Control, Less Protection:
- Revocable living trusts (offer no creditor protection)
- Trusts with you as trustee
- Reserved powers to change beneficiaries
Moderate Control, Moderate Protection:
- Irrevocable trusts with trusted family member as trustee
- Specified standards for distributions
- Limited powers of appointment
Less Control, More Protection:
- Fully discretionary trusts with independent trustee
- No required distributions
- No reserved powers
Your personal circumstances and priorities will determine where on this spectrum your planning should fall.
The Special Challenge of Long-Term Care Planning
When protection from nursing home costs is a primary concern, timing becomes critically important:
The Five-Year Rule
For any trust to protect assets from Medicaid spend-down requirements, the transfer to the trust must be completed at least five years before applying for benefits. This creates three distinct planning scenarios:
1. Healthy With No Immediate Concerns (Ideal)
If you're in good health and unlikely to need care within five years, you have the most options. A properly structured irrevocable trust can provide excellent long-term care protection once the five-year period passes.
2. Some Health Concerns But Still Independent
If you have developing health issues but are still living independently, you'll need a balanced approach that protects some assets while keeping others accessible for potential care needs during the five-year window.
3. Crisis Planning (Already Need Care or Will Soon)
If nursing home care is imminent or already needed, asset protection trusts won't help with Medicaid eligibility. However, other crisis planning strategies may still be available to protect a portion of your assets.
When Margaret came to me, her husband Edward had just been diagnosed with early-stage Alzheimer's. We created a two-part plan: placing some assets in a protective trust to start the five-year clock running, while keeping sufficient resources available to pay for care if needed before the five years elapsed. This balanced approach gave them the best chance of protecting at least some assets regardless of how quickly Edward's condition progressed.
Beyond Trusts: Complementary Asset Protection Strategies
While trusts are often the foundation of effective asset protection planning, they work best when combined with other strategies:
1. Limited Liability Entities
For business owners and real estate investors, placing assets in properly structured LLCs or limited partnerships can provide an additional layer of protection:
William owned several rental properties with significant equity. Rather than transferring them directly to a trust, we first placed each property in its own LLC, then transferred the LLC interests to his asset protection trust. This created two layers of protection from potential claims arising from the properties.
2. Strategic Use of Retirement Accounts
Many retirement accounts offer built-in creditor protection under state or federal law:
Rather than withdrawing funds from her 401(k) to make gifts to family members, Katherine kept those funds in her protected retirement account and used other assets for gifting. This preserved the natural creditor protection of the qualified retirement plan.
3. Specialized Insurance Products
Certain insurance strategies can complement trust-based protection:
Instead of transferring assets directly to his children, Thomas used some of his wealth to purchase a life insurance policy owned by an irrevocable life insurance trust (ILIT). This created immediate protection from creditors while providing significant benefits to his family in the future.
Taking Action: Five Steps to Protected Gifting
If you're concerned about protecting assets while helping loved ones, here's how to begin:
1. Define Your Protection Priorities
Ask yourself:
- What threats concern you most? (Long-term care costs, lawsuits, divorce, bankruptcy)
- How much control are you comfortable giving up?
- What's your likely timeframe before needing long-term care?
- Which assets are most important to protect?
2. Assess Your Overall Financial Picture
Work with your financial advisor to determine:
- How much you can safely transfer while maintaining your security
- Which assets are best suited for protection strategies
- What liquid resources you need to maintain
3. Consider Family Dynamics
The best technical solution still needs to work for your family:
- Who would make an appropriate trustee?
- How will protected gifts affect family relationships?
- What education do beneficiaries need about the structures?
4. Coordinate With Your Overall Estate Plan
Asset protection should integrate with your broader planning:
- Ensure consistent distribution plans across documents
- Verify beneficiary designations align with your trust strategy
- Consider tax implications for beneficiaries
5. Work With Experienced Counsel
Asset protection trusts require specialized expertise:
- Not all estate planning attorneys understand asset protection
- State laws vary significantly in protection offered
- Coordination between tax and long-term care planning is essential
Why Expertise Matters in Protected Gifting
Creating effective asset protection requires more than just standard estate planning knowledge. As someone who has been interviewed by USA Today, The Epoch Times, Live Life Large, and other national media outlets on these topics, and who provides continuing education to financial professionals around the world, I can tell you that the details make all the difference.
With offices in both Minnesota and Florida, our firm understands the nuances of asset protection laws in both states. Having taught continuing education to lawyers, financial advisors, and even IRS representatives, I've developed sophisticated strategies that work in the real world.
Don't Risk Your Life Savings With DIY Solutions
The cost of getting asset protection wrong far exceeds the cost of professional planning. Once assets are improperly transferred, the damage often cannot be undone.
Whether you're concerned about nursing home costs, potential lawsuits, or simply want to ensure that gifts to loved ones remain protected, we can help you develop and implement strategies that balance your desire for control with your need for protection.
Call us today at our Florida office at 941-909-4644 or our Minnetonka, MN office at 763-420-5087 to schedule a consultation. Alternatively, fill out the contact form on this page, and a member of our team will reach out to schedule your consultation.
At Roulet Law Firm, P.A., we provide sophisticated planning with the personal touch of a smaller firm, helping you protect what you've worked so hard to build while still helping the people you love most.
If you would like to discover more:
Download your copy of my guide, Save Our Home: How to Protect Your Home and LIfe Savings from Long-Term Care and Nursing Home Costs. Click here to get your copy.
Join us in my upcoming masterclass where I reveal strategies I use with my provate clients and their families to help them protect their home and life savings. Click here to sign up.
