Irrevocable Trust for Advance Medicaid Planning

Medicaid is the primary government program that pays for long-term care.  It is a means-tested program; If your countable assets exceed the limit ($2,500 in Maryland, $2,000 in Virginia and $4,000 in DC) you don’t qualify, and Medicaid will not pay for your care.

You can give your assets away, but Medicaid looks back five years from the date of your application for any gifts and imposes a penalty (delay in qualification) based on the amount of the gift.   So effective advance planning requires transfer of assets five years before the onset of the need for long-term care.   [1]

But is it necessary to transfer the property to an irrevocable trust?  Certainly, a person or couple can make an outright gift, not involving an irrevocable trust. An outright gift has the advantage of being simple and relatively inexpensive.  If it is a financial asset being transferred, many institutions have forms for changing ownership of assets so there could be no cost for the transfer itself.  For real property there is the cost of preparing and recording deeds.  And for any gifts in excess of the annual exclusion, currently $15,000 per donee, there is the cost of preparing and filing a gift tax return.

Why complicate things with a trust? The short answer is that the cost of making the gift is only one consideration. Many important benefits of gifting assets into a trust are lost by an outright gift. These benefits add a lot of value to using irrevocable trusts in Medicaid planning.

Key benefits of gifting in trust are:

  • assets in the trust, like assets given away, do not count on the transferor’s applications for means-based governmental benefits, such as Medicaid and Supplemental Security Income (SSI)
  • Asset protection from future creditors of the beneficiaries of the trust
  • Preservation of the exclusion of capital gain upon sale of the transferor’s principal residence
  • Preservation of the step-up in tax basis upon death of the transferor or transferors saving capital gain taxes
  • Ability to select who is taxed on the trust income – the transferors or the beneficiaries
  • Ability to select who will receive the income generated by the assets in the trust
  • assets in the trust are not counted if a beneficiary applies for Medicaid or Supplemental Security Income (SSI)
  • Ability to specify certain terms and incentives for beneficiaries’ use of trust assets
  • Ability to decide (through the transferor’s other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the transferors die
  • Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries
  • Possible avoidance of need to file a federal gift tax return reporting the transfer of assets to the trust

Each of these potential benefits depends on the specific language selected in the design and drafting the trust. None of them is automatic or inherent in every trust. Thoughtful planning and careful drafting are necessary to take advantage of the benefits available.  This post is just a summary. Contact us if you would like further information regarding advance planning to enable you to qualify for Medicaid if, at some future day, you need long-term care.

[1] All is not lost if the need arises sooner, but this topic was covered in previous posts and won’t be addressed here.