Medicaid eligibility is frequently a key component to a person’s long-term care plan if the person wants to protect assets from being used for long-term care. Among many other requirements, there are two primary requirements to be eligible for Medicaid. First, the applicant must have a financial net worth of less than $2,000. Second, the applicant must not have given anything away in the preceding five years to become that poor.
People may prepare by simply giving assets away at least five years before applying for Medicaid. This method works well unless the asset is one for which capital gains tax would be owed when the asset is sold.
For assets that could incur capital gains taxes when sold, giving the asset away before needing long term care (which is necessarily before death) can miss a chance to avoid capital gains taxes.
Capital gains tax can be minimized or eliminated for many assets if they are not given away by the owner until the owner’s death.
The catch 22 is that owning an asset means it is “countable” for Medicaid. Conversely, not owning an asset (for example, by giving it away) means that a chance to avoid capital gains tax may be forfeited.
Restricted, retained life estates can provide the best of both worlds for real estate to not “count” toward Medicaid eligibility while also providing heirs with the chance to avoid capital gains tax. But this only works for real estate.
A primary tool used to protect appreciated assets other than real estate (such as stocks and bonds) from Medicaid eligibility while also avoiding some or all capital gains tax is an irrevocable trust.
A trust is simply a set of rules. A person creating a trust can and usually does still “own” what is in the trust, but what is “in” the trust is subject to the rules.
Most trusts’ rules allow for the trusts to be amended or revoked. Trusts that can be amended or revoked are called “revocable trusts,” and they do not shield asset from being “countable” for Medicaid eligibility.
In contrast, an irrevocable trust cannot be amended or revoked. These trusts must include numerous, specific rules. For example, the trust must be established and funded at least five years before the Medicaid application date. Further, the trust must not allow changes to or cancellation of its rules. The trust must also preclude the owner from acquiring control of the assets in the trust.
In order for eventual heirs to avoid capital gains tax, the trust must also satisfy a number of IRS rules, including that the trust be defined as a “grantor trust,” as defined in the Internal Revenue Code.
Irrevocable trusts are almost always too complex for non-attorneys to reasonably prepare and use on their own. In fact, only attorneys familiar with the nuances of trusts in this context can ensure the win-win certainty sought by an irrevocable trust in order to preclude an asset from being “counted” for Medicaid while helping heirs avoid capital gains tax.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.