Medicaid and Masshealth
Planning to shelter your assets from Medicaid and Masshealth is a frequent concern of clients. I often receive questions from individuals regarding long term care costs such as nursing homes or assisted living facilities. They almost always end up involving a discussion about an Irrevocable Trust to protect assets from recovery by Medicaid (Masshealth). Many laypeople are familiar with this estate planning technique due to prominent ad campaigns. However, I seldom encounter people who know someone who implemented this strategy successfully. This article will examine exactly how a Medicaid planning trust works, and who they work best to protect.
Setting up the Medicaid Trust
First, let’s discuss how we would draft the trust and fund it. In order for your Medicaid Trust to shield the assets held within from Masshealth recovery, it’ll need to be irrevocable. That means that you will never be able to modify the terms of the Trust. Therefore, you will be unable to change the beneficiaries or their amounts. Second, you will not be able to be the Trustee of the Trust. This means you won’t exert any control over how the assets are managed and invested. Thus, you’ll have to assign this task to someone you know, or a professional who will charge you a fee.
Next, we’ll draft the Trust so that you will have zero access to the Trust principal. However, this fact will not apply to your primary residence because we can reserve your right to live in it. We do this by granting you a life estate in the deed. However, you wouldn’t have the ability to access any of the principal assets held by the Trust.
Trust Income
The next decision is whether you will have access to the income that the Trust generates. Masshealth will make you use the income to cover the expenses before them. Therefore, while it can be a benefit to have access to the income the Trust generates before you need Medicaid, it can end up negating the original purpose of the Trust. Indeed, Masshealth will provide little to no benefits if your Trust income is large enough.
Transferring Assets
After we’ve created the Trust, we need to fund it with all of the assets that you want protected from Medicaid (Masshealth). Ideally, this would be the bulk of your assets and savings. Thus, protecting the majority of your estate.
Funding your trust will involve changing title to all of the assets from your name to the Trust. In the case of bank, brokerage, or other financial accounts, you will need to execute paperwork with the custodian. Additionally, a deed will transfer any real estate that you own. Once these transfers occur, the trustee you named in the Trust will have access to these accounts while you will no longer be able to access them.
Five-Year Look-Back Period
It’s important to note that there is a five-year look-back period from the date you transfer the assets into the Trust. For example: if you apply for Medicaid (Masshealth) in January of 2025, Medicaid will be able to recover any transfers you made to irrevocable trusts during the prior five years. If you set up your Irrevocable Trust in 2010 but didn’t actually transfer any funds to it until 2021, you would not qualify for Medicaid. Indeed, the transfers to the Trust occurred within five years of the date of your application.
Gift Tax Requirement
It’s also important to note that you will have to file a gift tax return for every tax year that you make transfers to the Trust that exceed the annual exclusion amount (which is $15,000 in 2021). There is no gift tax until you use up your lifetime exclusion. However, there is still the filing requirement for any gift over the annual exclusion.
Medicaid Trust Taxes
The Trustee will have to administer the trust on an annual basis. Regardless of whether income will be distributed to you. Traditionally, these Trusts are drafted as grantor trusts. Which means that the income generated is reported on the grantor’s tax return and paid at their tax bracket.
Conclusion
Irrevocable Medicaid Trusts are an important tool for people who anticipate having long term care costs. Particularly, anyone who has a family history or diagnosis of Alzheimer’s disease, Dementia, Parkinson’s, etc. However, if you do not fall into that category and still wish to pursue a Medicaid Trust, I would advise using extreme caution. These Trusts have many downsides and administrative hurdles which will provide no net benefit if nursing home care is never needed by the grantor(s).
Additionally, while these Trusts are expensive to set up, they are even more expensive to break. If you end up changing your mind and wanting to unwind the Irrevocable Trust, it is not as easy as simply transferring all of the assets back into your name, you will need to hire an attorney to ensure that everything is done correctly, and no negative tax or legal consequences are suffered as a result of the wind down. Therefore, while Medicaid Planning Trusts were correct for only a limited number of people to begin with, the Build Back Better Plan makes it an even less attractive estate planning technique than it was before.
