Many aging individuals appreciate how much work they have done through their lives, how much risk they took, and how they were somehow able to save up enough money to live in retirement for over 20 years. Then, without warning, they have a stroke, or a fall, or are diagnosed with dementia, and it becomes clear to them that their aging health issues can erase their entire net worth in a mere few years. The family then finds out that receiving home care Medicaid is pretty easy, but to protect family assets from Medicaid nursing home care benefits requires you to be indigent for at least 5 years. And (unfortunately by predictably) the family home was never transferred or properly placed in a Medicaid Trust, meaning Medicaid will place a lien against it for your nursing home care.
If only you had transferred your house to a Medicaid Trust five years ago! Then your family would receive an inheritance and you would receive Medicaid benefits.
Here is the good news!!! There is nothing stopping you from changing the Deed to your house to being owned by a Medicaid Trust and protecting its value for your family members. True, you may not want to do this if you are health and in your 30s, 40s or 50s, but if you are in your 70s or 80s, or if you have a progressive illness, Medicaid Trusts may be a great option for maintaining your family wealth while simultaneously facilitating Medicaid eligibility. In fact, it is hard to imagine why an aging or disabled individual would not place their home in a Medicaid Trust.
In New York almost any non-retirement plan asset can be transferred to a Medicaid Trust, but the creator of the Trust cannot withdraw principle. This is why these trusts are also known as “Income Only Trusts” (because the creator can only withdraw income) or “Medicaid Asset Protection Trusts” (because the principle is protected for transfer to future generations). Many people in the 70s still have many years during which they can spend their investments on travel, food, and gifts to family members, so they don’t usually want to place their investments in a trust that limits them to receiving only the income on those investments.
But placing your real estate in a Medicaid Trust is ideal:
- The Trust allows you to continue living in the home the rest of your life by reserving a legal “Life Estate” for you and your spouse.
- Because you maintain that life estate the Internal Revenue Code allows a “step up” in your cost basis at death, so your children won’t owe capital gains taxes if they sell the home after your passing.
- In addition, since you are living in the home, you also continue to receive any STAR exemption on your real estate taxes. If you happen to be renting out a part of the home, the Trust can receive the rental income and transfer it to you.
- If one of your beneficiaries in the trust ticks you off and you want to now disinherit them, you can maintain a “Power of Appointment” in the Trust that allows you to change its ultimate beneficiaries using your Will when you die.
- Future Beneficiaries Can Access Principle: Medicaid Trusts only protect the assets from you and your creditors, NOT your children, who may (typically) withdraw principle whenever they want. You can limit this power, but you may want to maintain it in case there is an emergency and they need to withdraw trust funds for your benefit.
- Lastly, even if the house is sold (with your consent) any replacement home for you can be purchased by the Trust.
While all of these benefits do make the Medicaid Trust look like a great place to park your real estate, it is important to remember these points:
- The Medicaid Trust is irrevocable: You don’t like your original choice of Trustees? You want to cancel the Trust? You want to withdraw principle? Too bad, you can’t do it.
- You (and Your Spouse) Cannot be the Trustee: Yes, your family members (including your children) can be Trustee, but you do not legally have any control over any assets in the Trust. Make sure you trust your Trustee (there can be no “Trustee” without “trust”).
- If the Trust is receiving income from your downstairs renter / tenant, you need to distribute the income to yourself or face higher trust income tax rates.
- The 5 year “Look Back” for nursing home Medicaid still applies: Placing your home in the Trust anytime within the past 5 years does not protect the home from Medicaid pay-back.
- Another Reason Coops Stink: Many Coops do not allow their shares to be owned by your irrevocable trust, and Medicaid Trusts are no exception, so if you own a Coop none of this planning may be available to you.
The only major downside with Medicaid Trusts is the same downside with all irrevocable trusts: You cannot predict what will happen in the future and can only make so many contingency plans. Still, a half-decent attorney can establish one of these trusts for you with a lot of unforeseen issues being dealt with, the Power of Appointment is a sort of nuclear option to preserve trust assets, and you can’t get kicked out of the house even if you tick off your Trustee to no end.
In short: There are few good reasons not to place your home in a Medicaid Trust if you want to protect family assets while still receiving Medicaid benefits. Make sure you name a Trustee you feel will do the right things by you. And do not hesitate: Time is always the best friend (or foe) of Medicaid planning.