Medicaid Trust
What is a Medicaid Trust and Why should I have one?
Our Medicaid Asset Protection Trust protects your assets from the catastrophic expenses often incurred in connection with nursing home care. For most Americans, our Medicaid Trust is the preferable form of asset protection trust because, for purposes of Medicaid eligibility, this type of trust is the only type of self-settled asset protection trust that allows a settlor to retain an interest in the trust while also protecting the assets from being counted by state Medicaid agencies. In addition to protecting you assets from Medicaid and nursing care costs our Medicaid Trust Plus
also protects your assets from lawsuits, auto accidents, creditor attacks and medical expenses.
Even though our Medicaid Trust is irrevocable, you retain a high degree of control over your trust assets because:
Our Medicaid Asset Protection Trust protects your assets from the catastrophic expenses often incurred in connection with nursing home care. For most Americans, our Medicaid Trust is the preferable form of asset protection trust because, for purposes of Medicaid eligibility, this type of trust is the only type of self-settled asset protection trust that allows a settlor to retain an interest in the trust while also protecting the assets from being counted by state Medicaid agencies. In addition to protecting you assets from Medicaid and nursing care costs our Medicaid Trust Plus
also protects your assets from lawsuits, auto accidents, creditor attacks and medical expenses.
Even though our Medicaid Trust is irrevocable, you retain a high degree of control over your trust assets because:
- you can be the trustee if desired;
- you have the right to receive all of the trust income;
- you have the right to live in and use your real estate;
- you have the right to change trustees; and
- you have the right to change beneficiaries.
Q: I’m still healthy. Why should I care about avoiding nursing home expenses?
A: Because 70% of Americans who live to age 65 will need long-term care at some time in their lives, and because 50 percent of all couples and 70 percent of single persons become impoverished within one year after entering a nursing home. You can't just hide your head in the sand and hope that you are never going to need nursing home care. The best estate plan in the world is useless if you wind up in a nursing home and spend all of your money on long-term care.
Q: What is a Medicaid Trust and how does it work?
A: Our Medicaid Trust is an irrevocable asset protection trust that you create while you are living, that protects your assets from Medicaid and nursing homes PLUS probate PLUS creditors. You receive all ordinary income (interest, dividends, rent, and royalties) from the trust assets (at least annually, but as often as desired), including the right to live in any trust-owned real estate, but you can not have direct access to principal. If either you or your spouse has direct access to principal, the assets in the trust would be deemed "countable" for Medicaid eligibility purposes and would be completely available to almost all other creditors. Prohibiting direct access to principal is the key to why our Medicaid Trust works -- for general creditor protection and for Medicaid asset protection.
Q: Does your Medicaid Trust completely avoid probate, just like a regular revocable living trust?
A: Yes, if properly funded. So long as all assets are either titled in the Medicaid Trust or name the Medicaid Trust as the beneficiary on death, probate will be avoided.
Q: You say I can't have direct access to my principal. Does this mean I may have indirect access to the trust principal?
A: Possibly. There are two ways that you can have possible indirect access to the trust principal. The first way is that the trust is written so that the Trustee has the ability to make distributions of principal to the trust beneficiaries, who are typically your adult children. If the Trustee distributes principal to a trust beneficiary, that beneficiary can then voluntarily return some of that principal to you or use it for your benefit. There must not be any prior agreement that a trust beneficiary will return some of that principal to you or use it for your benefit. The second way for the Settlor to get at the trust principal is for the trust to be terminated, as explained below.
Q: I thought we were talking about an irrevocable trust? How can an irrevocable trust be terminated?
A: Our Medicaid Trust is an irrevocable trust, and many people, including lots of good estate planning attorneys, think that means the trust can never be revoked. But the fact is that the term "irrevocable" means only one thing - that the trust can not be unilaterally revoked by the creator of the trust. Although the Trust is irrevocable and can't be revoked unilaterally by the settlor, under common law and under the Uniform Trust Code, a non-charitable irrevocable trust can be modified, terminated, or partially terminated upon the consent of the trustee and all trust beneficiaries.
Q: What kind of people use a Medicaid Trust?
A: Typically clients who are in their mid-60s to mid-80s, already retired, and worried about the potential catastrophic cost of long-term care, and they want to protect the nest egg that they've been saving for a rainy day. The rainiest possible day for most people is the day they start needing nursing home care, and if they want to truly protect their nest egg and have it actually benefit them when the time comes, they know they need to do something to shelter that money. Our Medicaid Trust, for many people, is the best way to do that.
Q: What about Long-Term Care Insurance?
A: Most clients don't have long-term care insurance because they cannot afford it or can't qualify for it. For many clients, our Medicaid Trust is the best possible alternative to purchasing long-term care insurance.
Q: What assets can go into a Medicaid Trust?
A: The main types of assets that could be funded into the Medicaid Trust are the primary residence, any secondary residence, any non-mortgaged investment real estate, any non-qualified financial investments, ordinary bank accounts, and life insurance.
Q: Are their any capital gains tax implications for selling my home if I have titled my home into my Medicaid Trust?
A: No. The capital gains tax implications of selling a home from the trust are no different than if you sold it yourself as an individual. The Medicaid Trust does not affect the $250k capital gains exclusion available to each owner on the sale of a primary residence.
Q: Does a married couple create one joint Medicaid Trust or two separate trusts? And what happens on the death of the first spouse?
A: Some married couples create one joint Medicaid Trust and some create two separate trusts. Which way depends on multiple considerations, including whether or not the trustees and beneficiaries are identical for both spouses. On the death of one spouse, typically nothing changes, as both trusts were already irrevocable prior to death. For married couples with estates larger than the Estate Tax exemption equivalent amount ($5 million in 2011), the Medicaid Trust is designed to take advantage of both exemptions.
Q: Are there any assets that can’t go in to the Medicaid Trust Plus™?
A: The assets that shouldn't be transferred into the Medicaid Trust are your qualified retirement plans (e.g., IRAs and 401(k) plans) and your primary checking account. Most states treat qualified retirement plans as countable resources for Medicaid, so if you want to protect the assets in your qualified retirement plan from Medicaid by using a Medicaid Trust you will need to liquidate your retirement plan first, and pay any income taxes that are due as a result of terminating the plan. We usually do not put annuities into the trust either, but it depends on the type of annuity.
Q: What if a big percentage of my assets are tied up in a qualified retirement plan (e.g., IRAs and 401(k) plans)? Can I still do a Medicaid Trust?
A: Although qualified assets can't be transferred into the Medicaid Trust because of IRS regulations, it often makes very good sense to liquidate your qualified plans and transfer the after-tax balance into the Medicaid Asset Protection Trust. Although "conventional wisdom" typically recommends postponing paying taxes as long as possible, every rule has its exception. For example, converting funds from a traditional IRA to a Roth IRA has three significant benefits:
(1) You can avoid future mandatory disbursements from your IRA;
(2) Avoiding future mandatory distributions means your money can grow for a longer time, and will grow tax fee in a Roth IRA.
(3) By converting funds now, you owe tax at today’s ordinary income rates, and will never again have to pay income tax on these funds, or the growth in these funds. No one know if or when the federal government is going to raise tax rates, or whether your beneficiaries will be in a higher tax bracket. Assuming that either or both of these scenarios could become true, then converting now makes good sense. That is because paying the tax bill at your lower rate will ultimately produce more cash for your heirs than if you left the money in a traditional IRA and they paid the tax. See also: http://www.usatoday.com/money/perfi/taxes/2011-05-05-tax-cut-record-low_n.htm wherein USA Today states that “Americans are paying the smallest share of their income for taxes since 1958,” meaning that there is a significant change of taxes increasing over the years.
These same 3 exceptions, and a fourth and much greater exception, applies to converting funds from a traditional IRA into a Medicaid Trust:
(1) You avoid future mandatory disbursements from your IRA;
(2) Avoiding future mandatory distributions of principal means your money can grow for a longer time and, if put into tax-free investments, will grow tax fee inside the Medicaid Trust Plus™.
(3) By converting funds now, you owe tax at today’s ordinary income rates, and will never again have to pay income tax on these funds.
(4) Lastly, and most importantly, transferring assets from a traditional IRA into a Medicaid Trust protects those assets, after 5 years, from ever having to be paid to the nursing home for long-term care. Given that 70% of adults over the age of 65 will need long-term care, this asset protection feature of a Medicaid Trust is overwhelmingly more significant than the tax savings that might occur by leaving money in a traditional IRA which is completely exposed to nursing home expenses.