February 28, 2018
When we meet with estate planning clients for the first time, our estate planning attorneys will discuss a number of options focused upon the clients’ situation and goals. For clients interested in Medicaid nursing home asset protection, we explore creating an irrevocable trust for Medicaid asset protection, versus outright gifting of assets to the recipient**.
Setting the Stage for A Discussion of Irrevocable Medicaid Asset Protection Trust
An irrevocable trust created to protect assets from a nursing home has some potential advantages over outright gifting of assets directly to children. The complexities of Medicaid for nursing homes is more than we can adequately cover in this article. Moreover, we will not (in this post) consider issues within the five-year-look-back period. For this article, the irrevocable trusts and gifting should occur at least five years before you need to apply for long term Medicaid to pay for nursing home or assisted living costs.
Stop Nursing Homes From Taking Your Assets
With proper advanced planning, you can protect your assets from nursing homes.
With those caveats in place, our estate planning lawyers have provided answers to a series of questions that we regularly hear.
Doesn’t a Revocable Trust Protect My Assets?
No, a revocable trust will not protect your assets from a nursing home or assisted living costs. A revocable trust’s assets are considered owned by the trust creator. When applying for long term Medicaid to help pay for nursing home or assisted living costs, any assets in a revocable trust will be considered as “available” assets to the trust creator. Those assets will be expected to be used for nursing home costs.
Unfortunately, many professionals and others believe that a revocable trust will protect assets from a nursing home. The fact is that it is not that simple to protect assets from long term care costs.
What is Outright Gifting?
We use the term “outright gifting” to refer to gifting directly to the person receiving the gift. For example, deeding a house directly to a child or children. Or transferring a stock or bank account directly to a child or children. Outright gifts are not made to a trust, but rather made directly to the child or children. The gift recipient is then the legal owner of the gifted house, money or stock. (By “child” or “children”, we mean offspring and not necessary a minor under the age of 18.)
What Are the Risks of Outright Gifting to a Child?
Outright gifting places the asset directly in a child’s or children’s names. As legal owner, that child has all of the privileges, responsibilities and risks of ownership. The risks of outright gifting include (but are not limited to) the following:
- A child could sell or spend the money gifted to him or her.
- A child could be sued, invest poorly, or the gifted asset could be lost through a divorce.
- If a child experiences financial difficulty, the gifted asset could be foreclosed upon or taken by a creditor.
- A child could pass away and leave the asset to a friend or a spouse, and not as you would have intended.
In short, there are many risks with placing assets in a child’s name that could result in the unintended loss of the asset to third parties.
What Are the Tax Disadvantages of Outright Gifting to a Child?
The most notable tax disadvantage are a risk of incurring capital gains taxes. This typically happens in one of two ways:
- For assets that have increased in value, the outright gifting of assets to a child or children could result in unnecessary capital gains tax in the future. Without fully discussing “tax basis” and “basis step-up” upon death of an owner of appreciated assets, suffice it to say that gifting of assets that have increased in value may result in capital gains taxes upon the sale of the asset by a child or children. These capital gains taxes likely could have been avoided by not gifting the asset or by gifting the asset through a property structured Medicaid Asset Protection Trust.
- When the child is gifted a house (principal residence) and then sells that house while the parent is still alive, capital gains taxes may be incurred. Those could be avoided via a trust by taking advantage of the principal residence exclusion.
What is an Irrevocable Medicaid Asset Protection Trust?
An Irrevocable Medicaid Asset Protection Trust protects assets from the costs of long term care due to a long-term nursing home or assisted living stay. This specific trust is very specialized, geared specifically to protect assets from nursing home expenses.
Creating an irrevocable trust is a big step, since the settlor who creates the trust will not be able to amend, undo or revoke the trust. Assets transferred to the irrevocable trust are no longer owned by the settlor. They are owned by the trust, and controlled by the trustee of the trust.
So, a properly created trust that protects assets from a nursing home results in the trust creator losing control over the assets placed in trust. In Wisconsin, most irrevocable trusts can be amended, undone, or revoked with the agreement of the settlor, trustee and all beneficiaries.
Further, an irrevocable trust for nursing home protection cannot allow the assets (principal) of the trust to be returned to the settlor. Essentially, the trust creator is locking the assets away from him or herself, allowing the trustee to manage and control those assets. As such, an irrevocable trust must be thoroughly discussed and understood before creating and transferring assets to it.
What Are the Advantages of a Medicaid Asset Protection Trust?
There are a number of advantages to an irrevocable trust that outright gifting doesn’t provide:
- Assets are titled in the trust name, not in a child’s name. The trust owns the property. If a child has financial, divorce or other issues, the trust can provide protection and control over the assets.
- Assets for multiple children can be placed in one trust and not owned by multiple children outright. The most trusted child or children or another person can be named as trustee. This avoids placing a child (or children) who is not trusted or is not responsible in charge of the trust.
- The trust can hold assets for children for long-term support needs. It can provide for what will happen if a child passes away while assets are still in trust. For example, a deceased child’s trust share could be distributed to other children or grandchildren. They could also be held in trust for a grandchild’s education or other support needs. A trust could also make sure that assets are not distributed to a minor grandchild, the spouse of a deceased child, or back to the parent.
- Trust assets that have increased in value can receive a “step-up in basis” at the death of the settlor. For example, a house placed in an irrevocable trust that has increased in value can be sold after the settlor’s death without capital gains tax.
- A trust can allow the settlor to retain a “power of appointment” to change the beneficiaries through a will. Even though unable to amend the trust, the settlor can retain the power to change beneficiaries. This powerful feature also allows for some favorable tax treatment for the trust.
Outright Gifting or Irrevocable Trusts: Discuss with an Experienced Attorney
When to use an irrevocable trust, outright gifting, or deciding not to gift, is a complex decision. There is no one-size-fits-all method to protect assets from nursing homes.
Each person and family is unique in their circumstances, needs, and goals. Careful assessment of our clients’ objectives, family situation, health, and assets is the only way to create a proper estate plan. These factors will determine which approach is right for a specific client.
Our firm of estate planning attorneys has helped generations of Wisconsin families protect their assets. We invite you to contact us to discuss if an irrevocable trust for nursing home protection could be right for you and your family.
** For this article, we will assume that all gifts will be to a child or children. However, gifting is not limited to children.