Should irrevocable trusts be used 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. 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? 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:
• Potential asset protection from future creditors of trust beneficiaries;
• Preservation of the Section 121 exclusion of capital gain upon sale of the grantors’ principal residence (the grantor is the trustmaker);
• Preservation of step-up of basis upon death of the grantors;
• Ability to select whether the grantors or the beneficiaries of the trust will be taxable as to trust income;
• Ability to design who will receive the net distributable income generated in the trust;
• Ability to protect assets in the trust as noncountable in regard to the trust beneficiaries’ eligibility for means-based governmental benefits, such as Medicaid and Supplemental Security Income (SSI);
• Ability to specify certain terms and incentives for beneficiaries’ use of trust assets;
• Ability to decide (through the grantors’ other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the grantors die; and
• Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries.
These key benefits demonstrate that the use of irrevocable trusts in Medicaid planning provides many opportunities to create great benefits beyond simply transferring assets. If care is taken in the planning process, an irrevocable trust can greatly enhance the value of the clients’ Medicaid planning beyond what can be accomplished through outright gifting.
We are happy to assist seniors and their loved ones with considering whether an irrevocable trust may be appropriate for them. Please contact our office to schedule a time to discuss these issues further.