How Does an Asset Protection Trust Work?

An Asset Protection Trust (also called “Medicaid Trust” or “Irrevocable Trust”) is a type of Trust designed to shelter the money or property it owns. It is most commonly used in estate planning to ensure that your money and property is kept safe for your loved ones until you pass away. It is a great way to protect your assets from a nursing home.

Just like a Revocable Living Trust, you transfer your property or money into the Trust or perhaps name your Trust as a beneficiary of your retirement accounts or insurance policies. You name a Trustee to be in charge of holding and managing the Trust assets both during your lifetime and after you pass away. The Trustee agrees to hold the Trust assets for the beneficiaries until a later time of your choosing (usually at the time of your passing).

However, unlike a Revocable Living Trust, an Asset Protection Trust protects the money and property it owns both during your lifetime and after you pass away. This is a key distinction between these 2 different types of trusts. In Kentucky, money and property owned by a Revocable Living Trust is not protected. This means that if you need long-term care in the future, those assets could be taken.

Pros and Cons of Asset Protection Trusts

After reading about how Kentucky Asset Protection Trusts work, you might be wondering why anyone would choose a Revocable Living Trust instead.  However, Asset Protection Trusts come with some drawbacks that you should seriously consider before committing to this type of agreement in your estate plan.

PRO – It’s probably obvious by now that the biggest benefit to this type of Trust is the ability to protect your money and property for your loved ones.  This Trust takes away the worry of “what happens if I go into a nursing home.”  In Kentucky, the cost of a nursing home can easily exceed $100,000.00 each year.  Unless you have long-term care insurance, this is the biggest threat to your estate plan.  Placing your assets in an Asset Protection Trust eliminates that threat.  It ensures that the money and property you worked hard for will actually go to your loved ones after you pass away.

CON – In order to gain such great protection, it stands to reason that you must give up something in return.  In order to achieve asset protection, this Trust must be irrevocable.  This means that you cannot make changes to it later.  There are very few exceptions to this rule, but in essence, an Asset Protection Trust cannot be changed.  When you transfer assets to this type of Trust, you give up legal control of that asset.  This can be a scary thought for many people, which is why it is so important to discuss your situation with an experienced Kentucky Estate Planning Attorney.  You may find that giving up control will be okay because the benefits far outweigh the risk.  It also helps to have a Trustee whom you trust 100%.  At Bauman Estate Planning, we have the experience to advise you according to your needs and goals.

PRO – It’s not all or nothing.  You don’t have to transfer ALL of your money and property into your Asset Protection Trust.  You choose which assets you want to be under the Trust umbrella.  This flexibility is a great benefit because it means that you’re not giving up control of every single thing you own.  Perhaps you want to make sure your house is protected for your children, but you would still like to have regular access and control of your checking and savings accounts.  In that example, we can protect your home by placing it into the Trust, but leave your bank accounts alone.  This means those accounts won’t be protected, but it also means that you can withdraw and deposit just like you always have without any restrictions.

CON – Why can’t you just wait until you’re about to go into the nursing home to make these transfers?  In Kentucky, Medicaid has a 5-year lookback rule.  This rule means that Medicaid will penalize you for any money or property transfers you’ve made within the last 5 years.  This penalty means that Medicaid will not pay for you to be in a nursing home for a period of time, depending on the transfer you made.  This 5-year lookback rule forces Kentucky residents to do some planning well in advance of their potential need for long-term care.  You need to create your Asset Protection Trust at least 5 years before the need for a nursing home arises.  Sometimes it’s difficult to know when that time is right.  That’s why it’s good to speak with an experienced Attorney at Bauman Estate Planning about the timing of these decisions. PRO – No Probate + Asset Protection = Tremendous financial gain for your beneficiaries!  Just like a Revocable Living Trust, any assets owned by an Asset Protection Trust do not have to go through Kentucky Probate Court.  This means that your beneficiaries can receive their share of the Trust faster (if you choose) and without the cost of Probate.  The benefit of asset protection plus Probate avoidance means the savings from this type of estate plan far outweighs the additional cost of this Trust.

Is an Asset Protection Trust Right for You?

It depends on what you wish to achieve with your estate plan.  If your goal is to spend as little as possible on your estate plan and let your beneficiaries sort everything out, then this type of setup is probably not for you.  However, if your goal is to strategically plan for the future, not only after you pass away, but also during your lifetime, then an Asset Protection Trust is worth considering.  This is especially true if your goal is to make sure that what you own actually goes to your beneficiaries and not to the state if you ever go into a nursing home.

Think about each of the different assets you own.  For each account or piece of property, ask yourself what is more important to you…that you have control and access to it OR that it is protected for your loved ones?  If you decide that you would rather have access and control over ALL of your assets, then an Asset Protection Trust is not the way to go right now.  However, if you decide that you want one or maybe all of your assets protected for your loved ones, then we need to talk about an Asset Protection Trust today. 

If you anticipate the need for nursing home care sometime in the near future, then it’s probably too late to create this type of Trust.  If that is your situation, we need to explore other crisis planning options.  However, if you don’t think you will need long-term care in the next 5 years, then now is the time to discuss an Asset Protection Trust with Bauman Estate Planning.  Don’t wait until Medicaid’s 5-year lookback rule is a major concern for you.  Call me today because the time to do this planning could be right now! If you’re ready to get a comprehensive Kentucky estate plan, you’ve come to the right place.  I am glad to meet you at either my Dixie Highway or Breckenridge Lane office.  We can also discuss your situation by phone or Zoom if you prefer.

Here are some links to other Kentucky estate planning documents I can help you with:


General Durable Power of Attorney       

Medical Power of Attorney

Living Wills

Revocable Living Trusts

Asset Protection Trusts

Special Needs Trusts

Call Bauman Estate Planning today at (502) 267-7967 or click on the link at the top of the page to schedule a phone call or in-person meeting with Jason.