The Medicaid Trust is an irrevocable retained income trust. It typically provides that income will be paid to the parent during life, and at death the remaining principal will be paid to the children. There should be no right of invasion of the principal for the benefit of the parent. Parent may retain a limited power of appointment to redirect the disposition of the property among the children if one has health or financial problems. Such a retained power of appointment causes the gift to be incomplete for gift tax purposes, which eliminates the need for filing gift tax returns.
- A protected income stream is preserved for the parent, not available from the other alternative methods.
- Such a trust is fashioned to be includable in the parent’s taxable estate upon death. In this way, the income tax basis of the assets in the trust are stepped up, eliminating capital gains tax.
- If the residence is contained in such a trust, it can be sold and the trustee could purchase a replacement residence in another locale if appropriate. If parent moves into an apartment, the house proceeds would be available for generating additional income.
- Real estate tax exemptions may be preserved. Special drafting care must be taken however to preserve the exclusion.
- This method prevents the problem of the taxable income from the parent’s property being taxed on the income tax returns of the children. Since the parent is entitled to all income, it is income taxable to the parent.
- The trust assets will not be available for the needs of the parent. This could prevent use of privately paid home care which would be preferable to the parent, but which may not be available under Medicaid.
- The trust terms are irrevocable. If there is any change in law or regulation which jeopardizes such a trust, there may not be flexibility to adjust.
- Such a plan is more expensive to put in place and to maintain.
- It is best to have a trustee who is not a beneficiary under the trust. This may be difficult for the parent and perhaps unacceptable.
Planning for the problems of the nursing home and Medicaid have become an important element in the estate planning of every person who approaches old age, and even among some in middle age. There are many “tools” to use on the problem, but all require that the problem be addressed well before actual nursing home admission. Each of the alternatives are fraught with legal and tax ramifications which must be very carefully considered before proceeding, and the appropriate solution must take into account the circumstances of each individual and family.