Medicaid Trust Step Up In Basis

What Assets Step Up In Basis Upon A Persons Death

The step-up in basis can apply to many kinds of assets, including:

Gifting or bequeath these types of assets through your will or estate rather than giving them away during your life can make a big difference for your heirs.

In addition, under federal law, all community and marital property gets a new basis when the first spouse dies. Their death brings the property up to the fair market value at that time. So, a surviving spouse could sell these assets and take advantage of this adjusted basis. And, subject to certain exceptions, the qualifying property of the surviving spouse can also receive a second step-up in basis at their death.

Benefit Or Backfire: Navigating The Irrevocable Medicaid Trust

11.23.20inWealth Planning & Investing

Estimated Reading Time: 7 Minutes

An irrevocable Medicaid trust may be used to help protect assets from liquidation when the need for an extended nursing home stay arises. When this strategy works, a loved ones admission to a long-term care facility doesn’t require a substantial spend-down of investments, meaning wealth can be preserved and transferred to the next generation. But no irrevocable arrangement should be entered into lightly, especially if there are viable alternative protection strategies available.

Irrevocable Grantor Trusts For The Home

A trust is an arrangement where a Trustee holds the property for family members. The Trustees job is to administer the assets of the person who set up the trust and ultimately to disburse the assets to the beneficiaries of the trust . The parent retains no interest in the Trust. In an Irrevocable Grantor Trust, one or more of your children manage the property as Trustee. The Trust is not recorded on the land records of any town. You continue to live in your home and pay all of the expenses of the property including real estate taxes and insurance.

If you have to sell the home to go to an assisted living facility or nursing home, the grantor trust provisions allow you to use your entire $250,000 capital gain exclusion to shelter the gain in value from income taxation. Contrast that result with transferring the house to your children and retaining a life estate. With a life estate, the $250,000 capital gain exclusion for the sale of a home will only apply to the life tenants portion of the net sale proceeds. The children will have to pay thousands of dollars in income tax on the difference between the cost basis of the property and the sales price multiplied by their percentage interest.

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Does Inheriting Through A Trust Mean Losing The Step Up In Basis

A step-up in basis can be a confusing topic in estate law for someone who is not a New York estate lawyer. What it does is help eliminate capital gains taxes on estate assets that have gained value over the lifetime of the decedent so that no money is due to the government for those taxes. An example of this would be if a parent bought the family home back in the 70s for $10,000 and it is now worth $100,000. Instead of considering the $90,000 change in market value as taxable, the tax code steps up the value of the property to the fair market value at the time of death.

The reason this law was put into place is that, in a case such as this, the value of the home probably didnt rise because of investment gains, but rather because of simple inflation. However, if you take an additional example of someone having a stock portfolio that is initially worth $10,000 and then is worth $100,000 when they die a year later, step-up basis would still apply. If that same person traded their stock while alive with that much of a jump in value, they would have to pay taxes on the profit.

If you have a trust, it would fall under the category of things that your New York estate attorney could help you with when making estate plans for your beneficiaries. Besides setting up trusts, other things such as giving gifts, donating to charities or having ownership transfers of some property may all be the types of things that can be handled by your attorney.

Will A Medicaid Trust Also Help Me Obtain Ssi Section 8 And Snap Benefits

When you set up a New York Medicaid trust, this same trust can also help you qualify for SSI , SNAP and Section 8 benefits. Because each one of those programs has different requirements, it is important to consider not only Medicaid but also those programs when setting up your trust. The trust that is right for you may be an SSI, Section 8, SNAP and Medicaid Trust.

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Navigate Estate Planning With A Qualified Attorney

Planning to avoid capital gains taxes is a complex endeavor that a person should only undertake with the assistance of a qualified professional. Every persons situation is different, and there is no one-size-fits-all solution.

While saving money on capital gains may seem attractive, there may be situations where leaving assets to heirs upon your death may not be the best plan or may create more significant tax issues. In addition, it may not be the best strategy if, for example, you need to engage in Medicaid planning.

Contact us for answers to questions about capital gains taxes and whether you or your loved one may benefit from a step-up in basis.

This article is a service of . We dont just draft documents we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life and Legacy Planning Session, during which you will get more financially organized than youve ever been before, and make all the best choices for the people you love. You can begin by to schedule a Life and Legacy Planning Session and mention this article to find out how to get this $750 session at no charge.Please note this is educational content only and is not intended to act as legal advice.

Medicaid Irrevocable Trusts: Frequently Asked Questions

We receive a lot of questions from families about the nuances of irrevocable trusts, to preserve assets and become eligible for MassHealth/Medicaid. The following are answers to common questions:

What is the Difference between a Revocable Trust and an Irrevocable Trust

A revocable trust can be changed at any time, and the people who set it up and administer it have complete control over the assets. An irrevocable trust cant be changed, and the people who set it up do not have unlimited control over the assets. An irrevocable trust, however, can help people become eligible for benefits such as MassHealth, while a revocable trust doesnt.

How Does a Medicaid Irrevocable Trust Work

When you place assets into your irrevocable trust, you give up control of the assets. Because you can no longer access the principal, it is no longer countable when youre applying for MassHealth/Medicaid. There are other factors to consider for eligibility for benefits, however. For example, the value of the trust assets, the value of assets outside the trust, and how much time has passed since the transfers were made to the trust are all important considerations. There is a five year look back period for assets transferred to the trust.

Do I Receive the Income my Medicaid Irrevocable Trust Generates

Your trust may or may not allow the grantor to receive income from the trust. Its important to discuss this with your attorney.

How Will Income from my Medicaid Irrevocable Trust Be Taxed

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Understanding The Medicaid Asset Protection Trust

IntroductionThe Medicaid asset protection trust, or the Legacy Trust, as it is sometimes called, is an irrevocable trust designed to hold and preserve assets and either accumulate or distribute income. An individual transfers his or her assets to the trust and usually retains a lifetime income interest in the trust. The ultimate purpose of this trust is for an individual to qualify for Medicaid after five years from the creation and transfer of assets to the trust. Upon the death of the income beneficiary of the trust, the remaining assets may be held for the benefit of a surviving spouse or pass to the remainder beneficiaries, thus avoiding Medicaid estate recovery.

Prior to the Deficit Reduction Act of 2005 , the look-back period for transfers of assets was three years for a direct transfer to a beneficiary and five years to a trust. After passage of the DRA, the look-back period for a direct transfer to a beneficiary became five years as well. By creating parity between direct transfers to a beneficiary or to a trust, the DRA had the effect of expanding the market of potential clients for the five-year trust. This article will discuss non-tax and tax issues, as well as suggested ways of marketing the five-year trust.

Some grantor trust provisions are not advisable for Medicaid asset protection trusts, such as:

C. Dan Campbell, P.C.

Establishing A Qualifying Income Trust

It is not necessary to use an attorney when creating a qualified income trust. However, for many families it might make sense to do so. There are inexpensive guides and documentation available online to help those wishing to undertake the process themselves.

However, because Medicaid eligibility laws are very complicated and specific to each state, one may find that these guides do not provide adequate detail for their situation or their geographic area. Since the consequence of an improperly established trust means a denial of Medicaid benefits, for most persons it is advisable to find a Medicaid planning professional to assist in the process.

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Why Not Just Give Assets Outright To The Children

There are a number of ways that irrevocable trust planning is better than outright gifting, which are generally:

• If you just give assets to the children, will they spend it before you die of if you get sick and need the money? Having all the assets in the irrevocable trust only be distributed to your children upon your death, while keeping it in one location until then, is likely a better solution
• If most of your assets are placed in the irrevocable trust and you had a serious and unexpected downturn in health, the current trust beneficiary could terminate the trust and return the assets to you
• If you just give assets to the children, the assets do not receive a step-up in basis upon your death, potentially costing the family a great deal of money if your assets have gone up in value. Upon your death, your assets are not valued at their original basis, but will receive a new basis based upon the assets date of death value. This is generally referred to as a step-up in basis, which allows heirs to sell property without paying taxes on the gain during the decedents life. Thus, your heirs inherit the property with the date of your death value, thus providing a tax free gain in appreciated assets to your heirs.

The Value Of Using Irrevocable Trusts In Medicaid Planning

People often wonder about the value of using irrevocable trusts in Medicaid planning. Certainly gifting of assets can be done outright, not involving an irrevocable trust. Outright gifts have the advantages of being simple to do with minimal costs involved, including the cost of preparing and recording deeds and the cost of preparing and filing a gift tax return. Many financial institutions have their own documents they use for changing ownership of assets so there are typically no out-of-pocket costs for the transferor.

So, why complicate things with a trust? Why not just keep the planning as simple and inexpensive as possible? The short answer is that gift transaction costs are only part of what needs to be considered. Many important benefits that can result from gifting in trust are forfeited by outright gifting. These benefits are what give value to using irrevocable trusts in Medicaid planning.

Key benefits of gifting in trust are:

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Please Answer A Few Questions To Help Us Determine Your Eligibility

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Individuals who have assets in excess of the allowable Medicaid limits have limited options today when it comes to qualifying for Medicaid. This most often comes up when older folks are trying to qualify for nursing home or other long-term coverage, since even those with a fair amount of assets can’t afford the high cost of nursing homes.

The obvious option of giving away assets to others will result in Medicaid transfer penalties that will prevent the individual from qualifying for Medicaid for a period of time. This is true with giving away assets to most trusts as well.

If A Primary Residence Does Not Count As An Asset Why Do I Need A Medicaid Trust

Even though a personal residence does not count as an asset for determining your eligibility for Medicaid, the Department of Social Services can still place a lien on it after your death, so that the house would have to be sold to satisfy the lien instead of going to your heirs as an inheritance. A Medicaid trust protects your property from the Medicaid lien, allowing the property to go to your children as an inheritance instead of to the government.

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What If The Elder Is Already In The Nursing Home

This article is mostly written for those looking to protect their assets at least five years before they would apply for Florida long-term Medicaid. If your loved one is already in the nursing home or may be in one soon, we have more information on Medicaid and spend down planning. If your elder just went to the nursing home due to a downturn in health, you will want to read more on common questions to ask if your elder just went to the nursing home.

Is There A Delay Before A Medicaid Trust Starts Working

There may or not be a delay before the Medicaid trust kicks in, depending on the kind of property is involved.

For a primary residence, the benefits of a Medicaid trust start accruing right away, because you will qualify for Medicaid as long as the equity in your residence is less than about $870,000 and Medicaid has a record of not putting recovery liens on property interests.

There are three kinds of Medicaid: Regular,Home Care, and Nursing Home. You can be eligible for Regular Medicaid right away. There is a two and a half year waiting period for home care Medicaid. And there is a five-year look-back period for qualifying for Nursing Home Medicaid. If you try to get Nursing Home Medicaid before the five-year waiting period is up, there will be a one-month disqualification period for each $11,500 you put in the trust.

For any property other than the primary residence, you would need to wait five years to qualify for nursing home Medicaid or two and a half years to qualify for home care Medicaid. You would qualify for regular Medicaid right away.

Example 1:Example 2:Two and a half year look-back for home care:

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Will A Medicaid Trust Affect My Taxes

When you place your house into a Medicaid trust, you get the benefit of qualifying for Medicaid with no tax downsides.

After a person dies and leaves property to their heirs, the heirs can sell that property without having to pay capital gains taxes on the increase of the value of the property since the time it was bought. This is called step-up cost basis in tax jargon. Medicaid trust allows you to keep your step-up cost basis with the IRS, so that your heirs will not have to pay capital gains taxes when they sell the house.

Many New Yorkers qualify for STAR tax exemption. You will maintain your STAR exemption.

If you have tax abatements, you will be able to keep those too.

A correctly drafted Medicaid trust is grantor trust and a pass-through trust for tax purposes and should therefore not have any tax impact. Make sure the you retain an experienced attorney for your Medicaid trust, so that you can preserve your tax benefits. Like with any tax issue, make sure to discuss the trust with your accountant, so that your taxes are filed correctly, to be taxed at a personal rate and not at a trust rate.

Is A Medicaid Trust That Retains Step Up Value Of Assets A Completed Gift For Estate Tax Purposes

• Posted on Mar 17

My comments are not intended to establish an attorney-client relationship, are not confidential, and are not intended to constitute legal advice that can be relied upon. Proper legal advice can only be given by an attorney who agrees to represent you, who reviews the facts of your specific case, who does not have a conflict of interest preventing the representation, and who is licensed as an attorney in the state where the law applies. You should not post facts about your case because this is a public forum and is not protected by the attorney-client privilege.

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Overview: Qualifying Income Trusts

Income trusts provide a way for individuals whose income exceeds the Medicaid monthly limit to still qualify for Medicaid services.

To be eligible for Medicaids long term care benefits, an applicants income and assets must not exceed the allowable limits. Qualified Income Trusts , also referred to as Miller Trusts, are intended for those who have an income greater than qualifications for Medicaid allow, yet dont have enough income to pay for long term care.

With QITs, an individuals excess income is directly deposited each month into a restricted funds account. This means the money in the account can only be used for a specified reason. In the case of QITs, these funds can be usedstrictly to pay ones accrued medical bills and care costs, such as nursing home bills and Medicare premiums. By utilizing a QIT, a seniors excess income is not counted toward Medicaids income limit. Therefore, the individual becomes eligible for benefits.

• Medicaid Income-Only Trusts
• Income Cap Trusts

QITs must be irrevocable. This means that once the trust has been established, it cannot be undone, except perhaps in some extraordinary situations.

There are also methods for converting assets that are in excess of Medicaids limit. These are discussed in greater detail here.

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