The Importance of Trusts in Elder Care Planning

The Importance of Trusts in Elder Care Planning

By Ronald A. Fatoullah, Esq. and Elizabeth Forspan, Esq.

When planning for the possibility that one’s loves will need long term care services at some point in the future it is important for those planning to know all of their options. Medicaid has a program that pays for long term care. In order to quality for Medicaid, such as home care services or nursing home care, an individual must have resources below the Medicaid resource threshold (currently $15,150 of non-exempt assets). There are also income considerations to take into account when one is applying for Medicaid, however, those will be discussed in greater detail in a later article. This article will review how a Medicaid asset preservation trust may be used in order to plan for Medicaid.

As mentioned above in order to qualify for Medicaid the Medicaid applicant may keep $15,150 or less plus other exempt assets. Exempt assets, which are not “countable” by Medicaid, may include the applicant’s house so long as the applicant or their spouse or a minor or disabled child is living there. They may also include IRAs or qualified retirement plans which are in periodic payout status. Most of the other assets of the applicant will not be considered exempt thus it is very important that individuals plan in advance of needing Medicaid. Furthermore, while there is no look-back period currently for Medicaid home care, there is a five-year look-back for nursing home Medicaid. This highlights the importance of advance Medicaid planning.  Upon applying for nursing home Medicaid, the relevant Medicaid agency will look back at all assets owned or gifted during the prior sixty months. Thus, it is important that individuals and couples begin to engage in asset preservation planning for the purpose of Medicaid while they are still young and healthy.

There are a number of ways one can plan for Medicaid and try to protect and preserve their assets. One such way is through outright gifting. Outright gifting is where an individual, such as a parent, gifts his or her assets directly to someone, usually a child. While this might seem like the easiest way to plan for long term care, it is wrought with unintended consequences. For example, if a parent gifts his or her assets to a child so that the child will hold that assets for safe keeping, what would happen in the case of a child who unfortunately has a creditor? What about a child who at the time of the gift had no expected or real creditor but after the gift was made had some sort of an unfortunate event (such as a car accident or some other accident) that created a creditor that will now try to go after the assets. This would result in a very unfortunate negative consequence of the parent’s assets now being subject to the creditors of the child. This is certainly not a desirable result. Furthermore, there are some situations where a child predeceases the parent. In that case, had the parent made gifts for the child and then the child passed away, the assets of the parent could very well end up in the hands of something or someone undesirable.  If the child dies without a will and had children, there is a possibility that the grandparent’s assets will now end up in the hands of a minor child. This is certainly not a good result. There is also the case of child who was gifted assets only to have comingled the assets with their spouse at the time.  If the child then gets divorced, it is conceivable that the assets could end up in the hands of a former daughter-in-law or a former son-in-law. This would certainly not be an ideal situation. The aforementioned scenarios just highlight some of the non-tax potential consequences associated with making outright gifts. There are also many tax reasons why an outright transfer to a child or someone else produces an undesirable consequence or result.

When an individual makes a gift of an asset, the recipient of the gift (or the “donee”) will receive the gift at what is called a “carry-over basis.” That means that whatever the donor paid for the gift that will be the donee’s basis or starting point for calculating capital gains if the assets are later sold. With assets that have significantly appreciated, for example a home, this would mean that the child would have to pay a significant amount in capital gains taxes once the asset is later sold. This would be the case even if the asset is sold well after the parent dies. On the other hand, if one holds onto their assets until they die, then their children or whomever inherits the asset will benefit from a basis “step-up.” That means that the starting point for taxes will be the fair market value of the asset on the date of death of the owner. If the heirs or the children were to sell the asset shortly thereafter, there would be virtually no capital gains taxes due. Thus, it would seem that holding onto an asset until one dies would produce a very beneficial tax result. The problem, however, is that in order to qualify for Medicaid an individual will generally need to divest themselves of their assets. So how will they be able to hold onto their asset until the date of death in order for their children to benefit from a basis step-up? The answer to this question as well as the solution to the non- tax consequences of outright transfers lays in what we like to call the Medicaid asset preservation trust.

By transferring assets to a trust, which is drafted and administered properly, an individual may be able to avoid all the non-tax implications described above as well as many of the potential negative tax consequences. A Medicaid asset preservation trust may provide creditor protection, protection against the unintended consequences of a gift to a pre-deceased child and may also protect against a child who later divorces. Furthermore, assets transferred to a specific kind of Medicaid asset preservation trust which is an incomplete gift from an estate tax perspective, will benefit from a basis step-up. In addition, a home that is transferred to a Medicaid asset preservation trust may also benefit from the Internal Revenue Code Section 121 (a), Exclusion of Gain from The Sale of Your Principal Residence (the “$250,000 exclusion”). This would produce a very positive result, if the home was sold during the grantor’s lifetime.

Of course, as mentioned above, assets would need to have been transferred to the trust at least five years prior to applying for nursing home Medicaid. This why it is important to consider Medicaid planning when one is young and healthy enough. The authors generally recommend that individuals and couples begin planning in their mid to late sixties. However, individuals who have not done planning in their sixties and who are still healthy who still can anticipate being at home and not in a facility within the next five years, should certainly consider looking into this type of planning as well.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Elizabeth Forspan, Esq. is Managing Attorney at the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.  Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.


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