Irrevocable Trusts in Medicaid Asset Protection Planning
Income-only trusts cautionary notes; Special testamentary power of appointment and step-up basis of increased property valuation; Testamentary Trusts
Protecting your assets in Medicaid planning should involved an irrevocable trust before applying for Medicaid
Irrevocable Trusts for Protecting Assets in Medicaid Planning
While transferring assets is a great way to protect your assets and gain eligibility for Medicaid, there is a major disadvantage to asset transfers. When you transfer an asset, you basically give it away. This means that you no longer have control over that asset. Even when you transfer an asset to a trusted family member, they can run the risk of losing the asset or spending it for their own behalf. A better solution is to place the asset in an irrevocable trust. A trust is a legal entity in which one person is named a trustee. The trust holds legal title to the assets. Those who benefit from the trust are known as the beneficiaries. The named trustee must follow all rules associated with the trust. In some cases, the assets in the trust can be counted against Medicaid resource limits. This is why it is imperative to be aware of all rules and regulations regarding trusts and Medicaid eligibility.
It is also important to know the difference between an irrevocable and a revocable trust. A revocable trust can be changed or rescinded by the individual who created the trust. Since the trust can be changed, Medicaid considers this kind of trust to be an asset. All assets that are in a revocable trust will be considered when determining Medicaid eligibility. In short, when planning for Medicaid, revocable trusts are not useful tools.
Income-only Irrevocable Trust in Medicaid Asset Evaluation
Irrevocable trusts of the "income-only" version cannot be changed after they have been created. This type of trust is usually drafted so that the income from the trust can be paid to you for life. The principal cannot be applied to benefit either you or your spouse. When you die, the principal is then paid to your heirs. This allows the funds to be protected while giving you the opportunity to use the income from the trust for living expenses. The principal in this type of trust is not considered a resource for Medicaid asset evaluation purposes. However, if the situation changes and you move to a nursing home, the income from the trust will have to be paid to the nursing home. This is one of the disadvantages to an income-only irrevocable trust. Unless the trust is set up correctly, you are also not allowed access to the funds in a trust if you should need them for other purposes. This is why you should always have another source of funds aside from income from the trust.
Special Testamentary Power of Appointment – Step-Up Basis of Property
It is possible to place property in a trust. When doing this, you and your spouse will not be able to obtain payments of income, but could take loans from the trust. The trust must be set up so that your children will benefit from the trust income. If the trust contains property that has increased in value, the grantor, the creator of the trust, can retain a "special testamentary power of appointment." This allows the beneficiaries to receive the property upon your death. The receipt of the property will come with a step-up basis.
Testamentary Trusts in Medicaid Planning
The testamentary trusts are created under a will. There is a specific Medicaid rule that provides safety for these trusts if the trust was created by a deceased spouse with the intention to benefit the living spouse. The assets in these trusts are considered available to the Medicaid applicant, but this is only the case when the trustee has an obligation to pay for the Medicaid applicant's support. If the payments are left to the discretion of the trustee, they are not considered available. This is a good tool to utilize when planning for Medicaid. These trusts allow community spouses to leave funds for a surviving spouse that is in a nursing home. The funds are then used to pay for services that are not covered under Medicaid.
Supplemental Needs Trusts
There are certain exceptions by Medicaid regarding transfers that are made for the benefit of a disabled person under the age of 65. If you have a child, relative or friend that is under 65 with permanent disabilities, you can transfer assets. This is true even if you are already in a nursing home. It is important for these trusts to be properly structured. If done right, the funds that are in these trusts will not be considered owned by the beneficiary and will not be considered when determining Medicaid eligibility. However, if the disabled person dies, the state is required to reimburse funds from Medicaid that have been spent on behalf of that disabled person.
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