Medicaid Asset Protection Trusts (Irrevocable Trusts)
Anna came to us because she was terrified by the possibility of being wiped out by the potential cost of long term care. She knew that the cost of long term care exceeds most people’s incomes and could force her to deplete her savings over time. When it’s gone, she could be financially forced into a nursing home. Anna was happy to learn that protecting assets in a trust could enable her to qualify sooner for Medicaid to pay toward her cost of care, enabling her assets to last longer and therefore preserve her lifestyle longer or provide for her spouse or children over time.
Medicaid (Title 19, Title XIX) Asset Protection
Anna wanted to protect her assets by transferring some of them to her children, but she didn’t want to risk losing those assets if a child of hers went through a divorce, lawsuit, expensive medical problem, loss of a job, substance abuse problem, etc. She liked the idea of putting those assets into a Medicaid Asset Protection Trust instead.
Revocable Trusts, which are used for avoiding probate, do not protect assets from Medicaid because you can access the trust assets directly. A Medicaid Asset Protection Trust protects assets from Medicaid because it’s irrevocable and because the assets cannot be returned to you directly (and that means the State can’t take them either!). But, you still have control. To access trust assets, you ask the trustee (probably one of your children) to withdraw funds, put them in his or her account, and then cut a check to you. And, you retain a veto power over any withdrawals, so your child can’t withdraw anything unless you say so. Plus, you can remove a trustee if there is ever a disagreement (which tends to ensure that there won’t be any). Finally, you get to decide how the trust is distributed upon your death, just like in your Will.
Tax and Estate Planning Benefits
If you own your home and investments upon your death, your children will receive a stepped-up cost basis, allowing them to sell those assets with no taxable gain. However, if you quitclaim your house to them or transfer your investments directly to them, you also give them your cost basis and deprive them of the step-up upon your death. Therefore, they will pay capital gains tax on the difference between their sales price and your cost basis. The Medicaid Asset Protection Trust is written as a “grantor” trust, thereby enabling you to pass your assets upon death with a stepped-up basis so your children can avoid capital gains tax. You also can sell your house from the trust and avoid capital gains tax through the exclusion on a primary residence. Finally, you can continue to pay property tax on the house and deduct it on your 1040 to the extent it is deductible.
Transfers from you to the trust are not taxable gifts or income. Distributions from the trust to your children are reportable gifts if they exceed $15,000/year, but, due to your $11.2-million lifetime exclusion, you won’t have to pay any tax. And, all income on trust assets (interest, dividends, rents, etc.) is reportable on your 1040, so it is taxed at your rate, which is much lower than trust tax rates!
Medicaid Asset Protection Trusts Protect Assets from Your Children’s Creditors As Well
If you quitclaim your home to your children or transfer your other assets to them, your assets will be exposed to your children’s creditors. If a child of yours divorces, goes through a lawsuit, has medical problems, loses a job, develops a substance abuse problem, etc., he or she can lose your assets along with his or her own. The Medicaid Asset Protection Trust protects your assets from your children’s creditors, because your children don’t own your assets and therefore their creditors can’t claim your assets either.
Medicaid (Title 19, Title XIX) Asset Protection Trusts Also Avoid Probate
Your Trust will provide for your intended distribution upon your death (same as in your Will); therefore, the trust enables all of its assets to pass to your loved ones without the costs and delays of probate. Although asset protection is the main purpose of Medicaid Asset Protection Trusts, avoiding probate is a nice additional benefit.
Medicaid, Trust and Elder Law Attorneys in Danbury, CT
If you want a Medicaid Asset Protection Trust, the laws are complicated and change often with no notice to you. You won’t find a simple form online for this. Documents can properly protect you only if they are based on detailed knowledge of Connecticut-specific law on wills, trusts, probate and Medicaid, and a detailed understanding of your circumstances, assets and preferences. In fact, the overlap between Estate Planning and Elder Law is increasing all the time. If you want documents that accomplish your goals and protect you and your loved ones, consult with a Connecticut attorney who is widely recognized as both an Estate Planning attorney and an Elder Law attorney. Do it right, and do it once!