What is a Medicaid Irrevocable Trust?
A Medicaid Irrevocable Trust is a contract which if precisely followed over time protects assets for Medicaid purposes.
What is the Difference Between a Revocable Trust and an Irrevocable Trust?
A Revocable Trust may be changed at any time and the individuals who set it up have total control of their assets. An Irrevocable Trust can’t be changed and the people who set it up don’t have total unlimited control over the assets. While a Revocable Trust may sound like a better way to handle things than an Irrevocable Trust, the Irrevocable Medicaid the Trust gives us the opportunity to qualify for benefits while the Revocable Trust doesn’t.
How Does the Medicaid Irrevocable Trust Protect Assets so That You May Qualify Over Time for Medicaid Benefits?
When you place assets in the Irrevocable Trust you give up your right to control them. When you give up your right to control your money and your real estate, you limit your ownership. Because you no longer may access your principal, it is no longer countable as yours when you’re applying for benefits. Depending on the amount of assets you have placed into the Irrevocable Trust and the amount of time that has passed determines when you will qualify for benefits. It is imperative that all records and receipts are kept!
How Do I Know How Much Money to Put Into My Medicaid Irrevocable Trust?
This is a delicate balance which your attorney will assist you with. Typically, a portion of money is left out that may be used to cover the time where you are not eligible for Medicaid benefits. Typically, this is 5 years.
When I Create the Medicaid Irrevocable Trust Will I Qualify for Medicaid Immediately?
No. Qualification for Medicaid depends on many factors, including the amount of money you put in the trust, the money outside the trust and how long the money has been in the trust. There is a Five- Year Penalty Period for assets transferred to the trust. When you apply for Medicaid you need to disclose to the government the assets you’ve put in the trust for the last five years. Often one of the goals is to get past the five-year period where the government looks back before applying for benefits. If you need to apply before the five-year period has expired, a penalty period may be calculated at the time the Medicaid application is submitted. During that time, you are not eligible for benefits. Because each transfer of assets into the trust causes a penalty period, we recommend not adding money to the Trust without consulting your attorney because often it causes an adverse penalty period and messes up the original planning.
Should Checks I Receive Monthly From Social Security and My Pension Go Into My Medicaid Irrevocable Trust?
Monthly checks that come to you such as Social Security and Pension should not be added to the Medicaid Irrevocable Trust. Adding such assets to your trust may restart a 5-year lookback period. Again, it is important to discuss adding additional money to the Irrevocable Trust with your attorney to weigh the pros and cons.
May I Make Repairs to Assets in the Trust or Use Money Outside The Trust To Set Up Accounts Or Pay Fees?
You should not ever use money outside the trust to repair assets in the trust such as real estate, pay fees or set up accounts. That is considered an addition to the Trust which may cause an additional penalty period or lookback period.
Do I Receive the Income That My Medicaid Irrevocable Trust Generates?
It depends on how the Trust was set up and the advice of your tax preparer or financial advisor. If your Trust states that you, the grantor, receive income, then any income, interest, dividends or rent generated by the assets in the trust may be taken out annually. However, you don’t necessarily have to pull the money out if you don’t need it. If it is kept in the Trust, it becomes part of the principal and a 5-year lookback will apply to the yearly income. For this reason, we recommend taking the income out of the Trust annually.
Will I Have to Pay Personal Income Taxes On The Income Generated By My Medicaid Irrevocable Trust?
It depends on how the Trust was set up and whether you decide to take the income, but if you do choose to take the income it is typically taken out of the Trust prior to the end of each year so that the income will be taxed at your individual rate! Failure to do so may result in the income being taxed at the trust tax rate, which is often higher.
What Steps Do I Need to Take With the Income Generated By My Medicaid Irrevocable Trust?
At the beginning of each year, the Trustee will receive 1099s from the institutions for income earned by the Trust. You will take the 1099s to your CPA. Your CPA will be able to assist with 1099. The CPA may be able to issue a K-1 so that the income is taxed at your rate and not the trust rate. You may K-1 out the interests to the grantor without making an actual distribution of cash.
Will I Have to Have an Extra Income Tax Return Specifically For My Medicaid Irrevocable Trust?
Sometimes, but not usually. Unless directed otherwise, we recommend reporting trust income on your personal income tax return to receive the lower tax bracket. You should always speak to your CPA if you need clarification.
Is There A Way In An Emergency To Access Principal?
Yes. Sometimes the principal is needed to save the day. If this occurs, I will advise you or your trustee how to legally access principal without violating the terms of the trust. This should not be done without an attorney’s assistance and it is imperative that all records and receipts be kept. Never pay providers directly from the Medicaid Irrevocable Trust. This will corrupt your Medicaid Irrevocable Trust and that money will not be protected. There is a special way the Trust can be accessed in emergencies; please contact me if you ever need to access principle. Moreover, your children should never take money out of your Medicaid Irrevocable Trust for themselves.
What happens if I need Nursing Home Assistance Before the 5-year time Limit is up?
If this occurs, please contact me and I will advise you or your trustee.
What happens after the 5-year Lookback expires?
At this time, please contact me and we will schedule a meeting to determine if now is the appropriate time to put in a Medicaid application or spend down assets which were left out of the Trust.
When I create the trust, may I decide who receives my assets in the Medicaid Irrevocable Trust when I die?
Absolutely! Not only may you decide who should receive the assets when you are deceased, but you may change the beneficiaries during your lifetime.
Why Didn’t I just Give the Money to my Children, Five Years Before Needing Care So That I Could Qualify for Medicaid Without a Trust?
Giving money to your children is a recipe for disaster. Children often view such transfers as gifts. Moreover, such transfers are exposed to every problem which could befall your child.
What if your child gets sued, divorces, has an IRS lien, loses the money in the market, handles your money irresponsibly, dies or doesn’t provide for you when you need it. The trust takes these risks out of the picture and also allows a tax advantage for the assets they inherit when you die.
This All Seems So Difficult. Why Did I Create a Medicaid Irrevocable Trust?
You did this because you wanted to preserve part of your estate. Many people get sick and lose everything. Losing everything doesn’t just affect the person who became ill, but everyone in that person’s family. Whether you did this planning to make sure there is money left to take care of other family members, leave a legacy, keep from losing everything that you worked so hard for, or just because there is a legal way to safeguard your assets, Medicaid Planning is a great tool if it has been done correctly.
