The Value of Using Irrevocable Trusts in Medicaid Planning
By Martin Hersh, Esq.
To give or not to give, that is often a key question in Medicaid Planning.
People often wonder about when estate planning attorneys discuss the use of irrevocable trusts in Medicaid planning when it seems simple enough just to gift the assets outright..
It can appear that outright gifts have the advantages of being simple to do with minimal costs involved, including the cost of preparing and recording deeds and the cost of preparing and filing a gift tax return.
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 trust are forfeited by outright gifting.
The federal Deficit Reduction Act of 2005 (DRA) imposes a 5-year "lookback period" for ALL transfers; whether outright or in trust.
As a result, there are some real benefits of gifting in trust versus gifting outright. The use of irrevocable trusts in Medicaid planning, as in other fields of estate planning, provides many opportunities to create great benefits beyond simply transferring assets.
Key benefits of gifting in trust are:
- Asset protection from future creditors of beneficiaries
- Preservation of the Section 121 exclusion of capital gain upon sale of the settlors' principal residence - this is an exclusion from capital gains tax of up to $250,000 of capital gain in the taxpayer's principal residence when it is sold if the taxpayer owned and lived in it at least two of the past five years before the sale (only one of the past five years if the homeowner had to move to a nursing home). If there are two qualifying co-owners, they can each exclude $250,000 of gain upon sale in such circumstances.
- An ability to make assets in the trust "noncountable" in regard to the beneficiaries' eligibility for government benefits
- Ability to Determine Successor Beneficiaries.
Some or most of these benefits may be achieved through the use of an irrevocable trust. If care is taken to include the desired provisions, an irrevocable trust can greatly enhance the value of the clients' Medicaid planning beyond what can be accomplished through outright gifting.
With the new changes in the tax laws, it may be time for you to sit down to devise or refine your estate planning and Medicaid planning.
Call us today (845) 292-9345 for free consultation.
Don't wait until it is too late! Now is the time to plan for future contingencies.