Irrevocable Trusts: Pitfalls as Well as Benefits : Tax Shelters: Keeping Medicaid’s hands off the money is the key for those who face long-term hospitalization.
NEW YORK — In the old days, if someone set up a trust, it usually meant that they were pretty well off. Nowadays, lawyers often recommend trusts as a money-management tool for elderly people with middle-level incomes.
What is a trust? Simply put, it’s a way to transfer ownership of your property to someone else, a trustee, who will hold and manage those assets for you according to the terms of your agreement.
It works this way: You sock money and property into the trust, stipulating how and when the principal can be drawn, and how any income from those assets should be distributed by the trustee, usually a child or other relative.
Trusts not only provide for ongoing management of your assets in case you become disabled, points out lawyer and trust specialist Vincent Russo, but they also can be set up to provide for quick distribution of your assets upon death, avoiding the lengthy and often costly process of probating a will; help your heirs save on estate taxes, and protect your assets in the case of long-term or catastrophic illness.
To gain all these benefits, however, you need to create what’s called an intervivos irrevocable trust or, more specifically, a Medicaid Qualifying Trust.
Lawyers often suggest this for widows or widowers with, say, $50,000 or $100,000 in assets and couples with somewhat larger estates who want to shield their assets from the government if they ever have to go into a nursing home. Otherwise, at an average cost of $4,000 to $5,000 a month, long-term custodial care can quickly deplete your assets before you become eligible for Medicaid. In New York, the law now allows healthy spouses to keep up to $60,000 and still lets their husbands or wives be institutionalized at Medicaid’s expense.
Funds placed in trusts for this purpose should be transferred at least 30 months before applying for assistance.
Sound great? Well, don’t expect to have your cake and eat it, too. If the government is not going to touch your money, even if you apply for Medicaid, the trust must meet certain criteria.
For starters, it must be irrevocable. Once set up, Medicaid Qualifying Trusts cannot be altered or revoked, regardless of how circumstances change. So you can’t get that money back.
Secondly, the trust must be set up so that your trustee has no discretion in terms of invading the assets for you. They can, however, invade the assets for someone else, such as a grandchild. If Medicaid feels that you have even remote access to your money, they will go after it.
“This is where a lot of lawyers make a mistake,†said Cleveland attorney Armand Bundish, the author of “Avoiding the Medicaid Trap.’ “In the last month alone, I had three people come in with supposedly Medicaid Qualifying Trusts and in all three cases they were done improperly--the trustee was given discretion to provide principal for the grantor--and the worst thing was, they were irrevocable.â€
You can still arrange to receive the income from the assets in your trust, such as interest or dividends from stocks and bonds, to help pay your expenses. But if you do, and you then go into a nursing home, that income, though not the principal, will go to pay for your care.
Still, lawyers often recommend such income-generating trusts. “This way the principal is safe, and hopefully you can live out your life on the income,†said Charles Robert, a lawyer specializing in the elderly and disabled. “But if a health catastrophe occurs and you have to go into a nursing home, your assets will be protected.â€
Why not simply give your assets to your children as gifts, as many people do? You can do this--provided you do so 30 months in advance of applying for Medicaid, but since you cannot stipulate, legally, what they must do with the assets, your children may decide, instead, to spend it, or they may lose it to taxes, theft, legal claims, or whatever.
There also may be tax benefits from a trust, particularly if you’re transferring assets that have appreciated. “If real estate or stock has gone up tremendously in value, it’s better for your heirs to get them through a will or a trust, because the person only pays capital gains on the value difference after the date of death,†said David Goldfarb, a New York City lawyer. He explained that, if the asset is transferred as a gift, the recipient will eventually have to pay capital-gains taxes on the increased value since it was originally bought.
So, is an irrevocable trust for you? The answer may depend in large measure on your age and health.
“People are living a lot longer than ever before and (often are) in a healthy condition at the age of 85,†Robert said. “If you have a sickly person, the balance weighs toward a trust fund. But (not so) for a healthy senior with 10 to 20 years of productive life ahead, particularly when there may be other alternatives to consider, such as nursing home insurance.â€
In fact, unless you are sick or over 85, Robert said he thinks it is best to sit tight and not get yourself into an irrevocable position right now.
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