How To Overcome Qualified Account Obstacles
Clients often hit a stumbling block with irrevocable trusts when their portfolio is heavily weighted with retirement accounts. Qualified plan and/or IRA participants cannot transfer ownership of their accounts to a trust, making liquidation of some or all of the account the only way to fund the trust. In this case, there are a number of questions to discuss with clients:
Does the clients state consider retirement accounts countable assets for Medicaid? A number of states consider required minimum distributions as income but exempt the account. Other states count the institutionalized individuals qualified account as an asset but exempt the spouses account when assessing Medicaid eligibility. Still other states count the entire qualified account as an asset in a Medicaid eligibility assessment, regardless of payout status.
Given the five-year waiting period that exists with an irrevocable Medicaid trust, is there another strategy to protect the qualified accounts when the need arises? If the individual in need of long-term care has a healthy spouse, then there may be complex strategies available to spend down or transfer assets in excess of the available exemptions when the nursing home need arises. For example, clients may be able to make a transfer to their healthy spouse through the use of a single premium immediate annuity.
Irrevocable Trusts Created After 1993
The basic rule for irrevocable trusts created today is that any asset in an irrevocable trust that the trustee can choose to give to the beneficiary will be treated as a countable resource by Medicaid. To the extent the trust does not allow for any distribution to the beneficiary, it will be treated as a transfer of resources subject to Medicaid’s transfer penalty.
So while irrevocable trusts can protect assets from being counted by Medicaid , Medicaid will still count the transfer of the assets to the trust as a disqualifying transfer. Here’s how it works.
Whenever there is an irrevocable trust with a discretionary clause established by the individual or the individual’s spouse, and where the individual or the individual’s spouse is a beneficiary, Medicaid will count some or all of the assets in the trust as available to the individual.
The assets that Medicaid will deem available to the beneficiary and/or the spouse are those that are subject to the trustee’s discretionary power . Where the trustee lacks discretion to distribute assets, those assets will not be counted as resources for Medicaid purposes.
Unfortunately, however, the assets not counted as resources will be subject to a transfer penalty that will disqualify the beneficiary from Medicaid for a period of time. And since 2005, this penalty period starts when the individual applies for Medicaid, not when the transfer was made. Read about how long the Medicaid transfer penalty lasts.
Tax Advantages Of A Trust
Trusts also offer tax advantages. Assets in a trust benefit from a step-up in basis, which can mean substantial tax savings for the heirs. By contrast, assets that are simply given away during the owners lifetime typically carry the original cost basis.
Consider the following example. Let’s assume that shares of stock costing $5,000 when originally purchased are worth $10,000 when the beneficiary of a trust inherits them. In this case, that stock would have a basis of $10,000. Had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. Later, if the shares were sold for $12,000, the person who inherited them from a trust would owe tax on a $2,000 gain, while someone who was given the shares would owe tax on a gain of $7,000. Simply put: the tax consequences on assets received from a trust are greatly reduced.
By combining the creation of an irrevocable trust with a promissory note or the purchase of a private annuity, people may still preserve 40% to 50% of their assets.
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How Do Trusts Avoid Taxes
They give up ownership of the property funded into it, so these assets aren’t included in the estate for estate tax purposes when the trustmaker dies. Irrevocable trusts file their own tax returns, and they’re not subject to estate taxes, because the trust itself is designed to live on after the trustmaker dies.
What Is An Asset Protection Trust
An asset protection trust guards your resources from creditors. This type of trust is created by an individual and is irrevocable, meaning once the assets are in the trust, they cannot be removed or put elsewhere.
Asset protection trusts are shielded from creditors and lawsuits. That means if you find yourself getting sued, the resources will not be considered as belonging to you, and the creditor wont be able to demand payment or transfer of the asset. Assets held in a foreign trust can also be protected from divorce claims and civil actions.
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Contact The Mattar Firm
Medicaid planning can be complicated and confusing. Deciding how to go about things, and how to manage your assets can take time and a great deal of thinking about what youd like to see happen. It is vital to start the process early, to avoid things such as the Medicaid look-back period. Consulting with an experienced asset protection attorney at The Mattar Firm can help you make the right decisions for yourself and your family when the time comes. Contact us today at, 239-222-2222.
What Is The 5 Year Look Back Rule
The general rule is that if a senior applies for Medicaid, is deemed otherwise eligible but is found to have gifted assets within the five-year look-back period, then they will be disqualified from receiving benefits for a certain number of months. This is referred to as the Medicaid penalty period.
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Medicaid Asset Protection Trusts: How They Work
What are Medicaid Asset Protection Trusts ?
Why Are MAPTs Important?
Gifting Assets vs. Creating a MAPT
Type of Assets that go in a MAPT
Rule Changes by State
Cost to Create a MAPT
Alternatives to MAPTs
What are Medicaid Asset Protection Trusts ?
Medicaid Asset Protection Trusts can be a valuable planning strategy to meet Medicaids asset limit when an applicant has excess assets. Simply stated, these trusts protect a Medicaid applicants assets from being counted for eligibility purposes. MAPTs enable someone who would otherwise be ineligible for Medicaid to become eligible and receive the care they require, be that at home or in a nursing home. Assets in this type of trust are no longer considered owned by the Medicaid applicant. MAPTs also protect assets for ones children and other relatives, which is a win-win for Medicaid applicants and their families. Medicaid Asset Protection Trusts are also called Medicaid Planning Trusts, Medicaid Trusts, or less formally, Home Protection Trusts.
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Why Are Medicaid Asset Protection Trusts Important?
Why Would You Want An Irrevocable Asset Protection Trust
Most trusts created for estate planning purposes are revocable and changeable during your lifetime in order to avoid probate upon your death. But a regular revocable living trust is not an asset protection device.But, if you want to help ensure that your children receive an inheritance, then creating an irrevocable asset protection trust may be a good option. Here is an example of this type of trust:
Dad, age 80, is healthy. He has a home and about $500,000 in the bank and in brokerage accounts. He has 3 children he trusts and that he wants to leave a legacy for. After consultation with our office, he believes his health will last at least for the next five years. With this, he establishes an irrevocable trust and transfers some $400,000 of his assets, including his home, to his trust. His most trusted child is trustee of this trust, which distributes all trust income to Dad during his lifetime, but no trust principal. After five years, the trust assets are protected in the event dad goes into the nursing home and needs to apply for Medicaid. Upon Dad’s death, the trust assets, now valued at $500,000 due to growth, are distributed equally to his children, who also receive the assets with a “step-up” in basis, meaning the trustee can sell the assets income tax-free.
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How Does A Medicaid Asset Protection Trust Work To Protect Assets
An MAPT is a valuable tool in preserving assets from the costs of long-term care. An individual who wants to qualify for Medicaid benefits but has excess assets can set up an MAPT. They are then known as the trustor or grantor.
The trustor transfers the control of assets to a person or company known as the trustee. The trustee manages the MAPT and its assets for the trust period. During this period, the trustor can claim the income from the MAPT but not the principal. For example, they might receive the interest from funds deposited in a bank, but they could not withdraw the deposited amount.
Additionally, the MAPT is irrevocable. This means it cannot be changed or canceled, and assets held in it cease to be the trustors property. However, the trustor can remove and replace the trustee at any time. When the trustor places their assets into an MAPT, it triggers Medicaids look-back period of 60 months, except for California, where its 30 months.
Once this period passes, Medicaid cant count the assets in the trust. That means Medicaid cant use them in estate recovery procedures. Instead, the assets are protected for the people the trustor names as beneficiaries. Then, when the trustor passes away, the assets go to the beneficiaries without probate.
Living Trusts Wont Protect Your Assets
Unfortunately, living trusts wont help. Anything in a revocable trust will be treated as if you still own it. You still have control of the asset as if you still own it, or you can revoke it and retain ownership.
An irrevocable trust should also be done outside the five-year lookback period that Medicaid requires, which will also depend on the amount transferred into the trust. Youll also lose control of those assets and have no legal recourse if the trustee does not follow the set plan or decides to spend down the assets for themselves.
Under certain circumstances, even if some of your property is in an irrevocable trust, the state can still go after your assets, such as your house, even if they were originally an uncountable asset, and not part of your estate.
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How Much Does A Medicaid Trust Cost
Setting up an irrevocable trust can cost anywhere from a few hundred to thousands of dollars, depending on the makeup of your assets and estate.
Your trust may also have to pay annual management or trustee fees if you opt for an accountant, lawyer, or brokerage firm to act as a professional trustee, which can reduce the value of the funds .
While setting up a trust can be expensive, it may be worthwhile in the long term given the high cost of long-term care.
Does An Irrevocable Trust Make Sense For Your Medicaid Plan
Assigning a trustee to manage your assets can seem a risky venture, but the trustee cannot use your trust as their own piggy bank. They must act in your best interest. Regardless, its still best if you have confidence in the person you choose to become the trustee.
An irrevocable trust can prevent your assets from being distributed because of Medicaid Estate Recovery. Since your name is not associated with an irrevocable trust, the protected assets cannot be used for the Medicaid Estate Recovery program. This program is sometimes referred to as a death tax and is a frequent occurrence than the more commonly feared estate tax.
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How To Establish An Asset Protection Trust
Setting up an asset protection trust requires working with an experienced estate planning attorney. This kind of professional knows the intricacies of how the trusts work and what the trust laws in your state may be.
After finding an appropriate estate planning attorney, youll work with them to create the trust document. This will identify the trustee or the person who administers the assets, as well as the trust beneficiaries who will receive assets held in the trust.
Once the trust document is created, youll then have to place your resources within the trust. The type of asset protection trust you decide to use will determine how you fund it. For example, some foreign asset protection trusts require creating a limited liability company before you can transfer your property. There are also tax implications of funding a trust, so be sure to discuss them in detail with your estate planning attorney.
Can Medicaid Take Your Trust Assets
If you are a Medicaid beneficiary, the state can actually try to recoup payments for certain expenses, including a long-term care facility, after you pass away. This is known as estate recovery.
Medicaid won’t try to recover payments if you leave behind a spouse or a child who is under 21 years old or who is blind or disabled.
However, assets in a properly constructed irrevocable Medicaid trust are protected from Medicaid estate recovery.
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How A Trust Can Help Seniors Qualify For Medicaid And Preserve Assets
An asset-protection trust can help seniors in need of constant nursing care pay the substantial costs of assisted living or skilled nursing facilities and at-home help. Average daily nursing home costs can exceed $297 and can be significantly higher in certain metropolitan areas, according to a 2021 Genworth survey.
Medicare, the federal health care program for seniors aged 65 and above, only covers nursing home expenses when one enters a facility for short-term rehabilitation.Medicaid, a joint federal and state program, can cover the balance. But in order to qualify for the latter, a person’s total countable assetsincluding cash in bank accounts, plus investments such as mutual funds, stocks, and bondscan’t exceed $2,000 to $3,000, depending on the state.
People often exhaust their life savings before Medicaid kicks in, making it difficult to leave an inheritance or to provide for surviving dependents. By shifting assets into an irrevocable trust, individuals may qualify for Medicaid, while preserving a portion of their wealth for their loved ones.
What Are Alternatives To A Medicaid Asset Protection Trust
- Gifting assets to friends and family members
- Transferring assets to a spouse
- Establishing an income trust or funeral trust
- Taking out long-term care insurance
- Creating Medicaid compliant annuities or promissory notes
- Setting up a caregiver agreement
If you worry about what will happen to your assets if you ever require long-term care, its worth considering an MAPT. While its not the only option for protecting your assets, it can be a great option if youre unlikely to need care in the short term. Weigh the pros and cons and consider speaking to a lawyer experienced in estate planning to determine if an MAPT is right for you.
Zia Sherrell is a digital health journalist with over a decade of healthcare experience, a bachelors degree in science from the University of Leeds and a masters degree in public health from the University of Manchester. Her work has appeared in Netdoctor, Medical News Today, Healthline, Business Insider, Cosmopolitan, Yahoo, Harper’s Bazaar, Men’s Health and more.
When shes not typing madly, Zia enjoys traveling and chasing after her dogs.
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Medicaid Five Year Lookback Period
Additionally, Medicaid has a five-year look-back window. This timeframe is for assets that you transfer to a trust or sell. People who do this typically sell them for below market value. And then sell them family members and/or friends before applying for long-term care. Transfers of certain assets may be disallowed if they are made less than five years before you enter a nursing care or assisted living facility. If they are disallowed, that means you still own them. Therefore, you have to spend them down before you can qualify for Medicaid long-term assistance.
Why A Revocable Living Trust Does Not Protect Assets From Medicaid Spend Down
Unfortunately, a revocable trust offers zero protection for Medicaid planning purposes. This basically means the individual is not shielded for Medicaid planning purposes if they plan and move their assets into a revocable trust.
This is actually a very big and dangerous minefield that is floating around, and a lot of cases regarding this come into my office, such a trust will not protect the assets from the nursing home.
Proper Planning Needs To Be Done By An Elder Law Lawyer Who Understands Medicaid Law.
A common occurrence weekly in my office is the children or the grandchildren of a nursing home applicant comes into my office because they get the first bill from the nursing home and the first question I ask them is whether their parents or grandparents had done any planning?
There are often cases where no planning was done at all, although sometimes clients do come in and tell me that their parent or grandparent had a trust done. If I find out there is a revocable trust, then I have to explain to them that even though that trust was done many years ago, it would not give any protection to their assets for nursing home care. Unfortunately, that individual would not qualify for Medicaid and they would have to pay the nursing home facility through private assets.
Get your questions answered – call me for your free phone consultation 475-9639
Nursing Home Charges Can End Up Wiping Out The Estate
Get your questions answered – call me for your free phone consultation 475-9639
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