MEDICAID PLANNING USING IRREVOCABLE INCOME ONLY TRUSTS
For most clients, planning to obtain Medicaid is a last resort; however, with the catastrophic cost of long-term care exceeding $200,000 in many metropolitan areas, they are left with no choice. A careful review of a client’s assets, as well as their short-term goals and long-term objections, will determine whether transferring property to an Irrevocable Income Only Trust (“IIOT”) would be an appropriate part of an estate plan. Such planning, when used properly, can avoid the difficult decision to sell family legacy assets to pay for nursing care coverage.
Government rules and regulations attempt to ensure that Medicaid is in fact the payer of last resort. There are strict income and asset eligibility requirements, combined with a look-back penalty period, with rules and enforcement varying by state. The Deficient Reduction Act of 2005 extended the look-back period to five years on all transfers, including transfers to IIOTs. That means that clients must wait 5 years after transfer before applying for Medicaid. Since the IIOT must be in existence for five years, a critical question when funding the trust must be what assets the elder client can live without for a period of five years.
Moreover, since the Omnibus Reconciliation Act of 1993, unless certain exceptions apply (such as Special Needs Trusts), assets of a self-settled trust are considered available to the Settlor for Medicaid eligibility purposes regardless of whether trustee discretion is exercised or whether the trust was established for purposes of qualifying for Medicaid. Any trust principal which could be distributed under any circumstances, is considered an available resource for Medicaid purposes. Trust restrictions on when or whether a distribution may be made are disregarded. The intent of the 1993 Act was to minimize “Medicaid Planning”.
An IIOT is a trust set up to allow clients to meet the stringent Medicaid rules and requirements while preserving family legacy assets for future generations. The terms of the IIOT must be carefully drafted. Trust principal may not be distributed, under any circumstances, to the Settlor or the Settlor’s spouse. A “rainy day provision” can be added to allow the Trustee to distribute principal to family members, so long as the trustee does not have discretion to distribute to Settlor or Settlor’s spouse.
All income can be distributed to the Settlor. Trust assets are often invested in income producing securities while the Settlor is living autonomously. Once the Settlor goes into a nursing home, the Trustee may want to invest the trust assets in non-income producing securities. Note, the fact that the Settlor retains the right to IIOT in
For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.
In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.
