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As an Estate Planning Tool, a Safe Harbor Trust Offers Powerful Advantages that Make it Something to Consider

Anyone who has ever sailed in open water understands the idea of a safe harbor. When the weather threatens and the sea becomes turbulent, even the largest ships head for the calm, protective waters of a port where they can ride out the storm in safety – a “safe harbor.” In a metaphorical way, a Safe Harbor Trust is similar. It’s an estate planning tool that provides safety and security in the midst of financial storms. A Safe Harbor Trust not only allows you to protect your assets, but it also helps ensure that those assets accomplish what you want them to, even after you’re gone.

This article is intended as a broad and brief overview, to help you better understand the big picture uses of a Safe Harbor Trust. As with any estate planning tool, these Trusts have their advantages and drawbacks, and while they may be right for some, that doesn’t mean they’re right for everyone. If a Safe Harbor Trust seems to be something you want to consider, we trust you’ll reach out to us at AgingOptions so we can discuss the concept further.

The Basics: What Is a Safe Harbor Trust?

A Safe Harbor Trust is an estate planning tool or device that is flexible enough to allow you to protect assets in a number of different circumstances. Simply put, this tool allows you the legal power to set aside assets after you pass away – and in some cases while you’re still living – in order to ensure that those assets benefit you and your loved ones in the way you want them to.

You may not feel you have to worry about protecting assets, but the truth is that there are many circumstances in which asset protection is a vital part of estate planning. There are at least three ways for you to employ a Safe Harbor Trusts:

  • To protect money from estate taxes;
  • To protect money from potential conflicts between current and ex-spouses and heirs;
  • To protect money from Medicaid spend down requirements.

In the interests of brevity, let’s consider two of the most common reasons people employ Safe Harbor Trusts: to deal with long-term care costs and to protect loved ones where more than one marriage is involved.

Safe Harbor Trusts and Long-Term Care Costs

One of the chief benefits of a Safe Harbor Trust is its ability to keep your surviving spouse from having to deplete all his or her assets should they one day need Medicaid coverage for long-term care. As most readers of the AgingOptions Blog will know, unless you have long-term care insurance (or plenty of money), you will likely have to rely on Medicaid (or the VA) to cover the costs of long-term care. However, Medicaid benefits will only be available to you after you have spent down your assets to $2,000. Once that happens, you will no longer have the ability to affect the quality of your life.

A Safe Harbor Trust allows you to set aside some of those assets so that they are shielded against Medicaid’s spend-down requirement. Those assets could then be used to improve your quality of life once you or your surviving spouse are able to qualify for government aid. Under the relevant federal statute ( 42 U.S.C. 1396p, in case you want to research it), qualifying assets properly placed in the Trust are exempt from any spend down requirement of any means-tested benefits, including (and especially) Medicaid.

Since uncovered long-term care costs are the greatest single threat to a retiree’s assets, you can see how the Safe Harbor Trust can be an essential tool for your protection or that of your spouse.

Safe Harbor Trusts and Subsequent Marriages or Relationships

Rajiv Nagaich of AgingOptions has seen this issue cause trouble in too many families. “Today,” he says, “you might not even be able to consider the possibility of either of you being in a subsequent relationship. Leaving assets to each other likely sounds like the right thing to do because, what else would a spouse do other than to use the assets for his or her own needs and then leave it to your beneficiaries?”

Sadly, as Rajiv knows from decades of client experience, that kind of assumption can often prove naïve. As we live longer, there is a higher likelihood of remarriage, or entering into a subsequent relationship, after a first spouse dies. As this new relationship blossoms, you may have every intention of wanting to make sure some of your estate goes to the heirs from your first marriage, but talking about one of the more commonly-used tools to accomplish this – a prenuptial agreement – is awkward at best.

Besides, a “pre-nup” only works in limited instances. If you as the surviving spouse had been lured into a subsequent marriage by a manipulative person who fully intends to get his or her hands on your estate and then walk away, and you’re facing cognitive impairment, what is there to protect you and your rightful heirs? Such things do happen, and not just in the movies.

Here then is another use for a Safe Harbor Trust. It lets you set aside your portion of the estate so that assets will be limited for the benefit of your spouse, after which they will transfer to your beneficiaries. In this case, the trustee will be someone other than the surviving spouse, who will still have control over their half (but not yours) of the estate.

Now or Later: Two Ways to Set Up a Safe Harbor Trust

Once again, we lack the space to go into detail here – but if protecting assets in either of the two issues described above appeals to you, then you need to know that there are two different ways to incorporate the benefits of a Safe Harbor Trust. One is called a Testamentary Safe Harbor Trust, in which the Trust is created now, but activated when one of you dies. The other is called an Intervivos Safe Harbor Trust – “intervivos” referring to gifts made between people who are still alive. In this situation, you either gift your assets directly to the Trust (and out of your direct control), or you gift them to a trusted beneficiary who in turn puts the money in a Trust, ideally for your benefit.

Testamentary Safe Harbor Trust: This type of trust is essentially a “blueprint” created inside your Will that does not come into being until the death of the spouse. You continue to retain all assets in your name until the death of the first spouse, at which time the surviving spouse decides which half of the total estate needs to be transferred to the Safe Harbor Trust.  As noted above, qualifying for Medicaid benefits requires a drastic spend-down of assets to practically nothing. But assets in the Safe Harbor Trust are not counted as owned by your surviving spouse and therefore will not need to be spent down.  If your intent is to have the Trust act as an umbrella to protect the assets in the Trust against tax and medical costs, then the Trust must be created inside of a Will.

Intervivos Safe Harbor Trust: Here, instead of waiting until the death of you or your spouse, you can take an affirmative step to protect your assets by gifting them out of your name while you’re alive. Obviously, this option should be implemented only after careful consideration. You can employ this strategy by creating the Safe Harbor Trust and then naming a trusted individual as the beneficiary, placing selected assets in the Trust and outside your direct control (you cannot name yourself as the beneficiary). As an alternative, you can gift the selected assets directly to your chosen beneficiary and have them set up the Trust.

The Fine Print: Safe Harbor Trust Pros and Cons

Clearly, an article like this can only touch on the high points of the tool known as the Safe Harbor Trust. A more detailed conversation with an estate planning attorney is essential before you make up your mind whether this kind of Trust is right for you.

With an Intervivos Safe Harbor Trust, remember that you are handing over control of a portion of your assets while you and your spouse are still living. The beneficiary of those assets may or may not be someone you can trust to carry out your wishes. On the other hand, this type of Safe Harbor Trust does allow you to take advantage of the Trust’s benefits while you and your spouse are both living, a particular benefit if you both require Medicaid assistance.

As for the Testamentary Safe Harbor Trust – the one you create in your Will – it, too, has drawbacks.  For one thing, the Trust only comes into being when the first of you passes away. Only the surviving spouse will see any benefit from the protection of assets against uncovered long-term care costs. On the other hand, if the healthier spouse passes away first, the Safe Harbor Trust does prevent all of the transferred community assets from going directly back to the ailing spouse, at which time they would be subject to Medicaid spend-down requirements.

With a Testamentary Safe Harbor Trust, it’s also required that the surviving spouse cannot be the Trustee. Instead, you are free to choose any other person to fulfill this role, such as a family member or close friend. If the surviving spouse were Trustee with the power to control distributions from the Trust, all assets inside the Trust would be considered an available asset for Medicaid purposes and would count toward the $2,000 asset limitation.

One final consideration is that, with a Testamentary Safe Harbor Trust, the estate has to go through probate at the passing of the first spouse in order for the Trust to take effect. But Rajiv Nagaich argues that this should not be a deterrent. “In my opinion,” he says, “the effort and cost of going through this [probate] process is minor compared to the risk of having those assets left unprotected from uncovered medical and long-term care costs or from a second marriage.”

There’s much more to the story, so to speak, of the Safe Harbor Trust. Is this tool right for you? The answer depends on your specific goals and circumstances. Why not contact AgingOptions for a more in-depth conversation? It could be a game-changer for you, and for those you love. Age on!

PHOTO CREDIT: Copyright Ian Capper and licensed for reuse under this Creative Commons License

(original article by AgingOptions)


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