ASSET PROTECTION (Medicaid) IRREVOCABLE TRUST
ASSET PROTECTION (Medicaid) IRREVOCABLE TRUST
You might have heard of the high cost of nursing home care and were wondering how you would have any estate left for your children, if either you or your spouse needed to rely on Medicaid to help defray those costs. You have a home or a second home in Steamboat Springs, Colorado and were hoping that it could continue to be a common residence for years for your children and grandchildren to gather together both before and after you passing. You had some friends who put their home in the names of their children but that did not work out because either; 1) the children wanted to sell the home and use the money; 2) one of the children’s creditors attached the home and had it sold at sheriffs sale; or 3) when it was sold, they had to pay a lot of taxes. You wonder if there is any solution for this dilemma. Possibly an Asset Protection (Medicaid) Irrevocable Trust is the answer for you?
WHAT IS AN ASSET PROTECTION (Medicaid) IRREVOCABLE TRUST? A Trust is a written agreement which creates an entity to own and hold the residence and possibly other assets. It separates the ownership from its use and its management. The trustee(s), rather than you manage the assets. If setup properly and at least five years before you or your spouse apply for medicaid benefits, it would not be counted as an available asset to you or your spouse when qualifying for medicaid benefits. Moreover, if setup properly, it would not be an asset available to creditors, neither your or your children or your grandchildren, while the residence continues to be owned by the trust.
WHAT IS THE 5 YEAR LOOKBACK PERIOD? When you or your spouse applies for medicaid benefits to defray the costs of nursing home care, they ask the applicant to provide extensive financial information. You can only have Two Thousand Dollars ($2,000.00) or less in funds, a personal vehicle, a principal residence, miscellaneous jewelry and personal effects and a burial plan. Moreover, if you have a personal residence (and do not have an asset protection trust), after your death, medicaid can lien the residence and recoup the money that medicaid paid for your nursing home care. Moreover, medicaid has a look back period of five (5) years to determine whether you disposed of assets (whether money, stocks or property) for less than fair market value. If medicaid determines that you disposed of assets for less than fair market value during the five (5) years prior to applying for medicaid benefits, this disqualifies you from receiving medicaid benefits for a period of time based upon complex valuation formulas. Accordingly, the personal residence and other assets being transferred to the asset protection trust should have been completed five (5) years before you or your spouse makes application for medicaid benefits.
You can avoid the impact of the five (5) year period in a number of ways, for example, (1) you can prepare the asset protection trust and complete the transfer well before you are in need of nursing home care (at least 5 years before you apply); (2) you can keep sufficient assets outside the asset protection trust; and (3) you can purchase an insurance policy to cover nursing home care; and (4) a combination of the above methods. One must also keep in mind that the law is always subject to change and there has been discussion among lawmakers to extend the look back period to ten (10) years. After the look back period the assets are not considered by medicaid because you no long own therm.
WHAT DOES IT MEAN THAT THE TRUST IS IRREVOCABLE: Essentially, once the irrevocable trust is created by a signed writing and funded with the assets, the trust cannot be changed by you. Moreover, it is inadvisable to be the trustee of an asset protected trust. Hence, it is important to appoint a trustee who has your best interest at heart and is capable in managing a trust. Under the current law you can retain the power to remove and replace a trustee so long as neither you nor your spouse is trustee. While under current law, you and your spouse may continue to live in and use the residence and receive the income from the trust, neither you nor your spouse may receive principal from the trust. Accordingly, you need to be comfortable with giving up control and leaving the management of the trust up to someone else.
CAN YOU PUT PROPERTY IN AN ASSET PROTECTION (MEDICARE) TRUST IF YOU HAVE A MORTGAGE (deed of Trust/loan on the property)?
Most mortgages (deeds of trust) include a provision to the effect that if the property is sold or transferred, the balance of the loan is “due on sale”. However, under the federal law, national banks including federal credit unions, exempt the “due on sale” clause to a transfer into an Intervivous trust in which the borrow is and remains a beneficiary and which does not constitute a transfer of all rights of occupancy of the property. As to other lenders, state law needs to be consulted. In all cases, it is advisable, if the property has a mortgage (deed of trust), to contact the lender to determine if it would consider consenting to the transfer. Going forward, it could be difficult to refinance the property because the trust would probably have limited economic income or resources for repayment.
CAN A RESIDENCE BE SOLD?
The answer is yes, but there are impacts involved. Under current law, you can reserve a right to sell the home and replace it with another residence of equivalent value. Also, the trustee can sell the home and either replace it with another residence (which you could continue to reside in as your residence) or alternatively keep the principal in the trust. If the trustee sold the home and did not replace it with another residence, you would not get the proceeds of sale as you would if you owned the home out right. Rather the trustee would hold the principal but pay you the income received therefrom, assuming that you reserved the right to the trust income. The income received would reduce the amount of benefits received from medicaid to pay for nursing home care.
CAN MY OR MY CHILDREN’S CREDITORS ATTACH THE HOME?
Assuming that at the time of the transfer of the house it had no mortgage or deed of trust, you are solvent and the transfer is not for the avoidance of creditors knocking at your door, the house would be an asset of the trust, not yours, and a creditor who comes along later would not be able to attach the house to satisfy your debts or obligations. Similarly, the trust would be the owner of the house, would include a spendthrift clause, and the creditors of your children and grandchildren, and would not be able to attach the house for their debts and obligations. The exception would be taxes and any utilities and repair and maintenance expenses. Essentially, the trust’s liability would be limited to taxes, insurance, the mortgage,(if any), and housing expenses relating to the property, i.e. utilities, repair and maintenance.
CAN I CONTINUE TO LIVE IN THE HOME?
Under current law, yes. You can reserve the right to reside in the home or in the case of a condominium in a rental pool, reside in the condominium for up to 14 days a year.
HOW WOULD THE HOUSING EXPENSES BE PAID?
Normal and customary housing expenses would be paid by the resident or residents using the home. Normal and customary expenses would include taxes, insurance, repair and maintenance, utilities and homeowners dues and assessments (if any). Major renovations and upgrades may be construed as an additional contribution to the trust and be subject to a five year look back period from the time of the major renovation or upgrade. If you or your children were unable to use the home, it could be rented out, but assuming you reserved the right to the income, the income would be payable to you and reduce your medicaid benefits. If the property, such as a condominium, was in a rental pool arrangement, the rents would pay the expenses and possibly provide some income to you and at the same time could be used by you or your family during the owners use period.
CAN I CHANGE THE BENEFICIARY OF THE TRUST?
Under current law, you and or your spouse can retain a limited power to change the beneficiaries of the trust among a limited group, such as your descendants and charities and in what amount or in what proportion. However, you cannot reserve the power to appoint the remainder to yourselves, your creditors or your estate.
ARE THERE ANY TAX BENEFITS TO OWNING A HOME IN AN ASSET PROTECTION TRUST?
Under current law, there are two primary tax benefits if the trust is carefully and properly drafted.
First, assuming the transfer is deemed an incomplete gift for tax purposes, on sale of a primary residence, the trust would receive an exclusion of $250,000.00 of capital gain for one person and an exclusion of $500,000.00 on capital gain of a married couple. If the residence had appreciated, the exclusion could result in significant tax savings compared to an outright transfer of the home to their children where their tax basis would be the purchase price plus improvements.
Second, assuming you reserve the right to receive income from the trust, the residence at the time of death would be an includable asset in your estate for estate tax purposes and receive a stepped up basis in its valuation as of your date of death. Again, if the home was highly appreciated asset, this could result in significant capital gains tax saving upon its sale.
So if you are still reading at this point, you can see that an asset protection (medicaid) trust is a complex method of transferring assets to your descendants and hopefully be able to qualify for medicaid to pay for your nursing home costs and protect those assets from creditors. The method used is based upon the law as it currently exists and should be reviewed in the event of a change of law and before applying for medicaid benefits. If this trust is right for you, you should be discussed with an attorney familiar with the legal principles involved and capable of preparing appropriate documentation for you. Also, the trust should be flexible to the end that powers retained may be released or relinquished in the event of a change of the law. However, with the extraordinary cost of nursing home care, only a small percentage of the public is able to pay for it without spending their estate down to almost nothing.
Vance E. Halvorson © 2018
Asset Protection Agreement VEHWEB