Asset Preservation Planning Technique: Irrevocable Trusts

Irrevocable trusts, such as a Medicaid Asset Protection Trust or a VA Asset Protection Trust, may be used by grantors who wish to protect their assets from creditors and are ready to relinquish control over their assets to a loved and trusted family member. These trusts may be set up so that the grantor continues to receive the income from their assets in order to maintain their daily lifestyle or, if income is not needed, it is allowed to accumulate in the trust. This trust works well for seniors who do not typically access the principal of their assets and who are happy to turn over the management of the assets to the family member(s) who will inherit the assets when they die. The irrevocable trust is an excellent legal vehicle that allows the senior to secure government financial assistance to pay for costly long-term care (after a period of time lapses) and preserve his/her assets for their loved ones. If other sources of income provide sufficiently for the individual’s daily lifestyle expenses, then the income produced by these assets can remain in the trust and be added to the growing principal and will never have to be used to pay the grantor’s expenses.

Furthermore, the assets in the trust typically remain intact throughout the grantor’s life to ensure the money will be there for emergency purposes while the grantor remains alive. An irrevocable trust is also used to prevent creditors of the beneficiaries of the trust from accessing assets for attachment purposes and provides for multi-generational legacy planning, so grandchildren, great-grandchildren, and other descendants also receive inheritances and remembrances of the grantor. For gift tax purposes, no gift tax is due upon the creation of the trust provided that a “Special Power of Appointment” is reserved by the grantor(s), thus creating an incomplete gift for gift tax purposes. In addition, income taxes an interest, dividends, and capital gains can be taxed at the grantors’ lower tax rates (as compared to the higher income tax rates of the trust entity or
the beneficiaries). And, a step-up in basis can be achieved for assets that have appreciated in value so that no capital gains taxes will be due upon the sale of trust assets after the grantor has passed away.

An irrevocable trust is also a useful way to plan for one’s homestead property. Under the DRA, the equity in a home is limited. This home equity cap can be addressed by placing the home into an irrevocable trust so that the value of the home is no longer considered when determining one’s Medicaid eligibility. Another advantage of this approach is that it allows for the sale of one’s home during their lifetime, without jeopardizing the individual’s eligibility for Medicaid benefits.

Spenddown Planning

Elder Law assists clients in spending down their assets to achieve Medicaid eligibility. This may include a very simple spend-down plan involving the purchase of prepaid funeral arrangements with the remainder of assets being spent down on the individual’s cost of care. In fact, many of our clients retain us to handle the filing of a Medicaid application without seeking asset protection (either because there are insufficient assets or the clients prefer to spend the money down on the individual’s long-term care needs). The Medicaid rules and regulations are notoriously complex and we strive to give our clients peace of mind knowing that their loved one’s Medicaid application will be handled by us. At an average cost of $9,000-$10,000 per month for nursing home care, we understand our clients’ desire to have someone guide them through the Medicaid application process.

We have established relationships with caseworkers at the Department of Children and Families. This allows us to process applications more efficiently and address issues in connection with establishing a person’s Medicaid eligibility directly with a caseworker. We also counsel clients on more complex spenddown plans which require advance planning and other legal documents to implement. These plans may involve some form of trust, personal care contract, purchase of income-producing real estate, or pooled supplemental needs trust.

Finally, we can accelerate an individual’s Medicaid eligibility through a transfer of asset gifting program. This type of spenddown, typically referred to as “crisis planning,” can be an effective way to establish a person’s Medicaid eligibility where other alternatives are not viable. One of the most significant changes brought about by the DRA is the requirement to file a Medicaid application in order to trigger the running of a penalty period for Medicaid eligibility purposes. Another application must also be filed once the penalty period has expired and benefits are desired. This dual Medicaid application requirement has increased the complexity of the Medicaid application process.

Elder Law assists our clients in navigating this process to achieve the best results possible. When you’re ready to discuss Asset Preservation Planning, set up an appointment with one of our attorneys who will guide you through a four-step planning process:

Step 1— Information Gathering

During your planning session, which may be over the phone or by a video conference, our attorneys will gather information from you regarding your (and if applicable, your spouse’s) health, finances, and family objectives.

Based on the information, we will create a plan tailored specifically to you and your situation. The plan reviews in detail the options available to you to finance long-term care. During this stage, we review with you applicable Medicaid law and explain how your assets will be counted for Medicaid eligibility purposes. We also will review any financial transfers affected by the “look-back” period and the impact on you.

Step 2 — Analysis

Based on your individual situation, our attorneys will evaluate certain asset protection tools, including:

• Right of spousal refusal;
• Disinheriting an ill spouse;
• Commencing a gifting program;
• Income-producing real estate;
• Personal care contact; and
• Pooled Supplemental Needs Trusts.

Our attorneys will assess all Medicaid planning options available to you and determine the amount of resources you are entitled to retain under Medicaid standards. We also will review the benefits and income you would be entitled to if you apply for Medicaid benefits.

Step 3 — Recommendations

The primary objective of the plan is to protect your hard-earned assets. Of course, we also will take into consideration the income tax consequences as well as the estate and gift tax consequences of any recommendations. We will create a strategy to protect your assets from the costs of long-term care.

Each situation is different, but recommendations may include:

• Restructuring how assets are held;
• Funding certain trusts; and
• Deed transfers.

Step 4 — Implementation

Once we have presented the plan and our recommended strategy, we will help you implement the plan by drafting the appropriate legal documents, completing and submitting a Medicaid application, if appropriate, and working together with you and your other professional advisers.

How We Can Help

Our experienced attorneys will:

• Protect assets from estate taxes and the cost of long-term care;
• Assist you with filing applications for Medicaid and Veterans’ benefits;
• Recommend asset protection tools (i.e., right of spousal refusal, disinheriting an ill spouse, commencing a gifting program, income-producing real estate, personal care contact, or Pooled Supplemental Needs Trusts);
• Analyze tax consequences;
• Draft appropriate legal documents; and
• Complete and submit a Medicaid or VA benefits application, if appropriate.

We provide Asset Preservation Planning services throughout New York and Florida, and particularly in the following cities/municipalities and surrounding communities in South Florida near our offices:

• Palm Beach County: Boca Raton, Delray Beach, Boynton Beach, Highland Beach, Lake Worth, West Palm Beach, North Palm Beach, Palm Beach, Royal Palm Beach
• Broward County: Coconut Creek, Deerfield Beach, Fort Lauderdale, Hollywood, Margate, Plantation, Pompano Beach, Sunrise, Tamarac, Weston
• Miami-Dade County: Aventura, North Miami, North Miami Beach, Sunny Isles, Miami Shores

For more information, contact us today. At Elder Law, we give families peace of mind.