A Medicaid Trust Protects Assets if you Have to Enter a Long Term Facility for an Extended Period of Time
There are a number of different trusts available to address different situations. Trusts can be testamentary trusts created out of a will or separate stand-alone trusts known as intervivos trusts or commonly called revocable living trusts. Some trusts are created to avoid the probate process. Others are created to provide estate tax savings. Still others are created to avoid special need beneficiaries from losing need based assistance benefits such as Medicaid or SSI. Another type of trust is commonly known as a Medicaid Trust to protect assets in case the maker has to permanently enter a long term care facility in the future. A short overview of such a trust follows.
AN OVERVIEW OF MEDICAID TRUSTS:
Medicaid is a federal need based program to provide financial long term care benefits to those who have exhausted all of their assets. Medicaid also currently has a “look back period” of five (5) years, which basically means that if you give anything away less than five years before you apply for Medicaid, your application will be denied and a period of ineligibility will be imposed before you are approved for Medicaid benefits. One estate planning tool to avoid this problem is a Medicaid trust. A Medicaid trust is an irrevocable trust, which means that you cannot later revoke it or amend it. It also requires a third party being named as trustee, so that you cannot be trustee of your own trust. You lose control of those assets that are placed in the trust. A Medicaid trust commonly states that you receive all income from the trust, and if real estate is involved, that you may reside in the property. By doing this, provided that you do not apply for Medicaid within five years from establishing and funding the trust, those assets placed in the trust are sheltered from Medicaid and can be passed down to your beneficiaries. If this sounds too good to be true, there are downsides to establishing such a trust.
DOWNSIDES TO MEDICAID TRUSTS:
First, as stated above, you lose control of those assets placed in the trust. If you want to buy a new car or take a vacation, you cannot just use assets that were placed in this irrevocable trust. Second, if you place your residence in the trust and you are receiving a homestead exemption on your property taxes, you could lose the exemption because it is no longer owner occupied. You no longer own the home. The trust does. Another large negative involves capital gains taxes. If your residence has appreciated over time and you sell it, the first $250,000 of appreciation is exempt from capital gains tax ($500,000 for a couple) when you sell it as long as it is owner-occupied.
If you place the residence in an irrevocable trust and later have to or want to sell it, you lose that exemption because you no longer own the residence, and all appreciation is subject to capital gains tax at the time of sale. Also, if you hold onto your residence in your name until you die, your estate or beneficiaries get a “step up” in basis as to the value of the property as of date of death, also allowing them to avoid capital gains tax. When you place the residence in an irrevocable trust, you have made a gift to the trust, and the trust, or grantee, acquire the grantor’s basis and thus have to pay capital gains tax on the appreciation at the time of sale, even if the grantor has already died. Thus, there are clear pros and cons of establishing a Medicaid trust.
MEDICAID TRUST SUMMARY:
The bottom line that I tell clients is that none of us have a crystal. If you have to go into a long term facility for an extended period of time in the distant future, you probably will wish that you set up a Medicaid trust. If you never have to go into a long term care facility for an extended time in the future, you will likely regret having established a Medicaid trust. If you have any question on any of these issues, you should discuss them with an estate planning professional.
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Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.
