The Veterans Asset Protection Trust® ("VAPT") is a powerful tool that protects assets while enabling the Grantor to qualify for needs-based VA-pension benefits. The VAPT is a non-grantor trust with the option to include a grantor residence sub-trust. Why is the VAPT structured this way?
It is set up in this particular way to avoid affecting beneficiaries' eligibility for benefits. The IRS and the VA can speak with each other directly. The VA often examines pension recipients' tax returns to obtain information on their income. As a result, it is prudent to refrain from declaring any "phantom income" from a grantor trust on the grantor's tax return. The eligibility for benefits may be threatened by this increased reported income.
In the VAPT, the sole asset held in the grantor sub-trust is the residence. It is possible to arrange the VAPT such that the house cannot be rented out and that no income will ever need to be shown on the grantor's tax return. In addition, the revenues from the sale of the house must be managed in accordance with the terms of the non-grantor trust. The non-grantor trust is used to hold all trust assets other than the residence, ensuring that any income from assets won't affect beneficiaries' eligibility for benefits.
The VAPT retains significant tax benefits, such as basis adjustments and estate inclusion. These significant tax benefits will still be preserved under the VAPT's provisions, but they won't result in problems with "phantom income." The 121 exclusion is still in effect since the residence is owned by a grantor sub-trust.
People who are eligible to receive VAPT principal and income throughout the remainder of the grantor's life are known as lifelong beneficiaries. The grantor's needs or care may be covered by the lifelong beneficiary with this money. Many different approaches may be used to create the distribution plan for the lifetime beneficiaries. To give those lifelong beneficiaries the best possible asset protection, the plan might also name a Distribution Trustee.
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