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The Value of Using Irrevocable Trusts in Medicaid Planning

Written by: Carrell Blanton Ferris and Associates

Posted on: October 10, 2014

Clients often wonder about the value of using irrevocable trusts in Medicaid planning. Certainly gifting of assets can be done outright, thereby not involving an irrevocable trust. Outright gifts have the advantages of being simple to do and minimizing out-of-pocket costs—usually just the cost of preparing and recording deeds and the cost of preparing and filing a gift tax return. Financial institutions typically provide the necessary documents for changing ownership of accounts and do not require that the transferor pay for their assistance.

So, why complicate things with a trust? Why not just keep the planning as simple and inexpensive as possible? The short answer is that gift transaction costs are only part of what needs to be considered. Valuable opportunities can also be lost through gifting—opportunities typically worth thousands of dollars—and outright gifting can create more problems than it solves, which often means it ends up costing more than a trust. Preventing the loss of these opportunities and ensuring the avoidance of these problems are the reasons we recommend the use of irrevocable trusts in Medicaid planning.

Key benefits of gifting in trust are:

  • Asset protection from future creditors of the beneficiaries
  • Preservation of the Section 121 exclusion of capital gain upon sale of the trustmaker’s principal residence
  • Preservation of step-up in basis upon death of the trustmaker
  • Ability to select whether the trustmaker or the beneficiaries of the trust will pay taxes on trust income, and who will receive the income generated by the trust property
  • Ability to shield assets in the trust from being counted for purposes of the beneficiaries’ eligibility for means-based governmental benefits, such as Medicaid and Supplemental Security Income (SSI)
  • Ability to specify certain terms and incentives for beneficiaries’ use of trust assets
  • Ability to decide (through the trustmaker’s other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the trustmaker’s death
  • Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries

If you are interested in learning more about asset protection planning, please contact us.

(Content provided by ElderCounsel; reviewed and edited by Jeremy L. Pryor, Esq.)

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