Medicaid Planning: Irrevocable Trust
If long-term care insurance is not an option, and personal income and resources are not sufficient, one planning technique is to transfer assets into a "Medicaid" Trust, retaining the income for the "Grantor", and preserving the principal of the assets (the assets held by the Trustee) for the spouses, children or other beneficiaries of the Grantor. When properly drafted, the trust will provide asset protection, with significant tax benefits as well, including avoidance of gift taxes, and elimination of capital gains taxes. In addition, trust assets will avoid probate. The trust allows the Trustee to access the principal of the trust during the Grantor's lifetime for the benefit of the Grantor’s children or other beneficiaries, although the Trustee cannot give the principal directly to the Grantor. Most Grantors also choose to maintain the right (called a Special Power of Appointment) to change the ultimate beneficiaries of the trust, by "reappointing" the assets to different family members at a later date. This power retains control for the Grantor, and prevents transfers to the trust from being treated as taxable gifts.
A properly drafted "income-only" trust that gives a Trustee no discretion to distribute principal to the Grantor-Beneficiary, or to his or her spouse, is still a viable long-term care planning tool. Therefore, a senior doing estate planning may keep the income from an irrevocable, "income only" trust for himself or herself, with the remainder distributable to specific beneficiaries, and qualify for Medicaid without the assets in the trust being considered as available by the State and County to pay for the cost of long-term care.
In addition, should the trust own your primary residence, you will have the exclusive right to occupy and enjoy the property and you should not lose any of the real estate tax exemptions you had prior to the transfer into the trust. A deed transferring the primary residence while retaining a life estate can certainly help the family in several ways. Moreover, you can direct the Trustee to sell the residence and purchase another for you from the proceeds of that prior sale. Please note however, that obtaining mortgage financing (including a reverse mortgage) will not be possible should an irrevocable trust own your primary residence.
Unlike a transfer of an asset to an individual, it is very important to note that due to the legal protections of this type of a trust, if a personal issue should affect you, your trustee or another beneficiary (such as divorce, premature death or court judgment), the trust property should be entirely protected as none of these individuals have any personal ownership rights over the property within the trust.
Please be wary to not confuse a “Revocable Living Trust” with this irrevocable trust. While a revocable trust may have several benefits and uses, it is important to note that a Revocable Trust does not offer asset protection. A revocable living trust is typically only implemented for asset management and probate-avoidance reasons.
This Memorandum is based on current law and is for informational purposes only. It is important that you discuss all legal options and consequences with a qualified elder law attorney prior to any action. Should you wish to discuss your situation with us, please call (631) 424-2800 for a consultation. For additional Memoranda, please call or visit our website at www.elderlaw.pro.
