The rising costs of long-term care and the likelihood of needing some form of long-term care have made it critical to proactively plan to preserve assets to prevent potential impoverishment. By proactively planning while healthy, one can maximize asset protection and prevent assets from being depleted by long-term care costs. The most effective way to shield assets from the government’s reach for this purpose is through a Medicaid Asset Protection Trust. Transferring assets to a Medicaid Asset Protection Trust can enable an individual to protect assets and still qualify for Medicaid benefits.
What is a Medicaid Asset Protection Trust?
A Medicaid Asset Protection Trust is an irrevocable trust established by a grantor with someone other than the grantor designated as trustee to manage the trust. The grantor transfers assets, such as a house, cash accounts and investments, to the trust with the goal of beating the government-imposed five-year look-back period for all asset transfers. If the Medicaid Asset Protection Trust contains assets for five years prior to applying for Medicaid benefits, then all of the transferred assets are protected and the government cannot force the grantor to spend down those assets on long-term care.
What are some additional benefits of a Medicaid Asset Protection Trust?
- Grantors can control who inherits and how beneficiaries use assets
- Grantors can specify successor beneficiaries and control how beneficiaries are able to use trust assets by structuring trust distributions that meet their estate planning goals. For example, a grantor can stagger distributions so that the trust beneficiaries receive their allotment gradually over time instead of all at once or specify that the funds are to be used for educational purposes or when beneficiaries reach certain milestones.
- Including a Limited Power of Appointment in a Medicaid Asset Protection Trust allows the grantor to control who receives trust assets, how much, and in what manner. This power gives the grantor the ability in the future to change beneficiaries and distribution terms of the trust.
- Protection from creditors and protection for disabled beneficiaries
- The Medicaid Asset Protection Trust can protect assets from creditors of the grantor and trust beneficiaries. If assets are gifted outright to an individual instead of to a Medicaid Asset Protection Trust, then the gifted assets would be exposed and subject to creditors of the recipient.
- A grantor can provide for disabled beneficiaries who receive government benefits so that the disabled beneficiaries do not receive distributions outright and jeopardize their eligibility.
- Capital gains tax benefits
- The IRS affords individuals a $250,000 exclusion of the capital gain from the sale of their primary residence if it was their primary residence for two out of the five years preceding the sale under IRC Section 121. The Medicaid Asset Protection Trust qualifies as a grantor trust and thus preserves this tax break for a primary residence transferred into the trust, which is important for primary residences that have appreciated in value over time.
- When a beneficiary inherits an asset at the death of an owner that has appreciated since the deceased owner initially obtained the asset, that beneficiary receives what is called a “step-up” in cost basis to fair market value. When assets transfer at the owner’s death, the asset value determination is at the date of death instead of when the deceased owner obtained the asset originally, thereby eliminating or reducing any capital gains tax. Through grantor trust status and a limited power of appointment, the Medicaid Asset Protection Trust can preserve the step-up cost basis, which is important for highly appreciated assets in the trust. If an individual gifts assets outright during his or her lifetime instead of to a Medicaid Asset Protection Trust, then the step-up in cost basis will be lost and potentially expose the recipient to capital gains tax at sale.
Professional & Experienced Help is Available
The Medicaid Asset Protection Trust is an effective estate planning tool to protect assets from Medicaid’s reach. If you would like to further discuss the Medicaid Asset Protection Trust and its benefits, please contact My Ohio Estates today to schedule a consultation.