Many people give away assets as a strategy for Medicaid Planning, but there are benefits they miss by not considering an irrevocable trust.
Irrevocable trusts can be a very valuable tool with proactive Medicaid Planning. Certainly, gifting of assets can be done outright, which would not involve an irrevocable trust. Outright gifts have the advantages of being simple to do with minimal costs involved. So, why complicate things with a trust? Why not just keep the planning as simple and inexpensive as possible?
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 a trust are forfeited by outright gifting. These benefits are what give value to using irrevocable trusts in Medicaid planning.
There are 8 key benefits to gifting through a trust that we think everyone should consider:
1. Asset protection from future creditors of beneficiaries — If your child (or other beneficiary) gets in a car accident involving a lawsuit or goes through a divorce later down the road, your inheritance to them can be protected by the trust instead of losing that money or asset to a lawsuit or ex-spouse.
2. Preservation of capital gain (via the Section 121 exclusion) upon sale of the settlers’ principal residence — If the value of your home has appreciated over time, then you don’t want to lose that appreciation to taxes if you sell the home. With the use and protection of a trust, you can preserve that appreciation instead of losing the appreciation to taxes.
3. Preservation of step-up tax basis upon death of settlor(s) — Similar to point #2, this benefit has to do with tax liability and appreciation gains made by real estate or investments. Normally, when someone passes away these gains are preserved via the step-up in the tax basis of the investment. Bottom line: if a trust is used properly, a trust can save your heirs A LOT of money by preserving all this appreciation in the investment with reduced taxes.
4. Ability to design who will receive the net distributable income generated in the trust — A trust generally gives you more choices than an outright gift, and the trust can be customized to the individual needs of the client.
5. Ability to make assets in the trust non-countable in regard to the beneficiaries’ eligibility for means-based governmental benefits, such as a Medicaid and Supplemental Security Income (SSI), with a special needs trust — If you have a disabled child who is receiving government benefits, you don’t want their inheritance to reduce their government benefits. Ideally, they can receive their inheritance and keep their government benefit. A trust preserves these government benefits and gives you (and your child) a lot more options without jeopardizing their benefits as well.
6. Ability to specify certain terms and incentives for beneficiaries’ use of trust assets — A trust can give you the opportunity to pass on your wisdom and values, not just your money, to future generations.
7. Ability to decide (through the settlers’ other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the settlers die — Essentially, a trust can allow you to decide if someone is unable to handle their inheritance properly.
8. Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries — A trust allows you to decide who the contingent beneficiaries will be along with other possible recipients of the trust. The trust provides the ability to cover the potential outcomes over time with multiple beneficiaries.
Each of these potential benefits depends on the specific language selected in the design and drafting of the trust. None of the benefits are automatic or inherent in every trust. Thoughtful planning and careful drafting is necessary to take advantage of the full benefits available, thus it is important to understand how and why each benefit comes about. This post is just a very basic introduction to this complex topic. We are available to discuss any of these issues with you in more detail. Please give us a call at 913-345-2323. We would be more than happy to talk with you.