New Medicaid Planning ToolAugust 22, 2017 | Jeffrey S. Greener |
The most costly item in retirement isn’t housing; it’s healthcare. According to the AARP, some 70% of Americans will require long-term care during their lifetime.
With nursing homes in New York costing $12,000 to $14,000 per month and the future of Social Security and Medicare unclear, many retirees risk financial ruin unless they have put a plan in place to provide for their long-term care.
Absent a plan, should you end up in a skilled nursing facility, the government will use your assets to pay for your care until your assets (real estate, investments and cash) fall to the level that qualifies you for Medicaid. Only then will Medicaid pay for your long-term care.
Adults over 50 should begin planning to protect their assets from the cost of long-term care. The rules dictating what assets can be protected, however, are complicated, so it is best that asset protection planning be done under the guidance of a legal professional.
If you are in good health and you have the financial means, consider purchasing long-term health insurance to protect your assets from the high cost of long-term healthcare. If long-term care insurance is not an option, transferring assets into an Irrevocable Income Only Trust or “IIOT” is an effective planning technique, especially when transferring assets to children is unadvisable or impossible.
IIOTs allow individuals to transfer their assets into a trust as protection in lieu of making outright transfers to their children. Under the terms of an IIOT, the person establishing the trust (“grantor”) receives all of the income produced by the assets in the trust for the grantor’s lifetime. By transferring assets into an IIOT, the grantor will still reserve some control and retain some interest in the transferred assets – advantages that are not available when assets are given outright to individuals. If the grantor places his or her home into the trust, the trust agreement can specifically provide for the grantor to continue to reside in the home for the grantor’s lifetime.
Because IIOTs are irrevocable, the grantor cannot revoke the trust and reacquire the assets; therefore, the assets are not available for Medicaid eligibility purposes.
IIOTs are commonly used to permit Medicaid to pay for the high cost of long-term care once the Medicaid “look-back period” – currently set at five years – has passed. The look-back rule means that Medicaid will penalize an applicant who transfers assets, either by gifting them to others or placing them in a trust, within five years prior to filing a Medicaid application.
Assets transferred into an IIOT more than five years prior to filing a Medicaid application will not impact Medicaid eligibility. If assets are transferred into an IIOT less than five years prior to filing a Medicaid application, a penalty will be imposed. The five-year look-back period would then begin when the individual enters a nursing home and is otherwise eligible for Medicaid.
In addition to their asset-protection benefits, IIOTs also offer tax advantages. The grantor is treated as the owner of the trust for income tax purposes. This is valuable because the trust’s income tax rates are usually higher than the grantor’s. Additionally, the IIOT can be drafted to include the trust’s assets in the grantor’s estate for estate tax purposes and can be drafted to permit a grantor to change the beneficiaries who will receive the assets upon the grantor’s death.
Upon the grantor’s death, the trust assets are distributed to the grantor’s chosen beneficiaries and obtain a “step-up” in value, meaning that the asset’s cost basis for income tax purposes will be the value of the asset as of the grantor’s date of death. As a result, the beneficiaries will avoid any capital gains taxes on the appreciation of the trust assets between the date of acquisition and the grantor’s death if the asset is sold after the grantor’s death.
The IIOT should not be confused with a “Revocable” or “Living” Trust. While a Revocable/Living Trust may have several advantages and uses, it does not offer any asset protection and is typically only implemented for asset management and probate-avoidance purposes.
Properly drafted, the IIOT is a powerful tool in the Medicaid planning toolbox with many benefits to clients and their loved ones.