What can be done to plan for long-term care, ensure that a health crisis or chronic illness will not erode an individual’s security and dignity, and provide for family and loved ones? As you might suspect, the answer is not simple. A careful analysis of each individual’s personal and financial situation must be done to formulate the proper plan. Factors such as income from social security, pensions and investments; a nature and value of assets; age and health; family situation; and other considerations must be evaluated in order to make the right choices. (A comprehensive questionnaire which we have prepared to assist our clients in gathering the information needed is available upon request.)
If long-term care insurance is not an option, a personal income and resources are not sufficient,one planning technique is to transfer assets into a “Medicaid” Trust, and preserving the principal of the assets (the assets held by the Trustee) for spouses, children or other beneficiaries. When properly drafted, the trust will provide asset protection, with significant tax benefits as well, including avoidance of gift taxes, and elimination of capital gains taxes.
In addition, trust assets will avoid probate. The trust allows the trustee to access the principal of the trust during the Grantor’s lifetime for the benefit of the Grantor’s children or other beneficiaries, although the Trustee cannot give the principal directly to the Grantor. Most Grantors also choose to maintain the right (called a Special Power of Appointment) to change the ultimate beneficiaries of the trust, by “reappointing” the assets to the different family members at a later date. This power retains control for the Grantor, and prevents transfers to the trust from being treated as taxable gifts.
A properly drafted trust that gives a Trustee no discretion to distribute principal to the Grantor-Beneficiary, or to his or her spouse, is still viable long-term care planning tool. Therefore, a senior doing estate planning may keep the income from an irrevocable, “income only” trust for himself or herself, with the remainder distributable to specific beneficiaries, and qualify for Medicaid (once the applicable “penalty period” has expired) without the assets in the trust being considered by the Department of Social Services as available to pay for the cost of long-term care.
Some assets are more suitable candidates than others for inclusion in a Medicaid Trust. The home and other real estate, life insurance policies and investments with large appreciation in value (and hence subject to capital gains if sold) make good choices. Deferred annuities and traditional IRAs require special consideration, and rarely should be transferred to Medicaid Trust because of the income tax implications.
If the home is the only asset to protect, a deed to children or others, with a retained interest in the Grantor, will protect the property and the right to Medicaid, once the applicable “penalty period” has expired, along with preserving the STAR exemption and other tax benefits. However, because the penalty period begins only after the applicant is otherwise eligible for Medicaid and files a Medicaid application, the applicant must have outside funding available for his or her care needs until the penalty period expires. Consideration must also be given to the fact that if the property is sold and the grantor is in the nursing home, a portion of the sale proceeds equivalent to the value of the life estate (using Medicaid tables that give the higher value than and IRS life expectancy table) will have to be “turned over” to the nursing home. Furthermore, new legislation makes a retained life estate reachable by the State after the death of Medicaid recipient.