Looking for Medicaid Asset Protection?

Not Just for the Wealthy

Looking for Medicaid Asset Protection? Trusts are often part of the estate planning checklist and an important piece to investigate as part of Medicaid asset protection plan.

What is Medicaid asset protection? It is the planning for protection from Medicaid and the  “spend-down” requirements.  For more information on Medicaid Asset Protection click here.

First it is important to understand what a trust is? A trust is legal mechanism that allows you to direct how and when your assets will be distributed upon your death. There are five common or standard forms of trusts involved in estate planning and trusts.

Trusts Explained

The family trust:

(Also known as a credit-shelter trust or a bypass trust) you write a will bequeathing an amount to the trust up to, but not exceeding the estate-tax exemption. This, of course will depend on the state in which you live.

Then you pass the rest of your estate onto your spouse, tax-free. You also may designate how you want the trust to be used – for example, you may direct that income from the trust be used after you die for your spouse and that when he or she dies, the remaining principal will be distributed tax-free among your children.

Your spouse is also entitled to an estate-tax exemption. By using this strategy, the two of you can effectively double (or more than double) that portion of your children’s inheritance that is shielded from estate taxes.

As an extra bonus: Money placed in a family trust is free of estate tax, forever, even if it grows with interest. That means if the money in the trust is invested wisely by the surviving spouse the children’s inheritance can virtually grow.

You always have the ability to pass an amount equal to the estate-tax exemption directly to your children upon your death, but the reason for a family trust is to protect your spouse financially in the event they need income from the trust or in the event you think your children will squander their inheritance before the surviving spouse dies.

Dynasty trust:

Also known as a generation-skipping trust allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior – typically your grandchildren.

Beware, if you leave more than the exemption amount, the bequest will be subject to a generation-skipping transfer tax. This tax is separate from estate taxes, and is designed to stop wealthy seniors from funneling all their money to their grandchildren.

Qualified personal residence trust:

A qualified personal residence trust (QPRT) can totally remove the value of your home or vacation home from your estate /assets and is very useful if your home is will appreciate in value.

A QPRT lets you give your home as a gift, usually to your children, while you keep control of it for a period that you stipulate. For example, let’s say 12 years. You may continue to live in the home and maintain full control of it during that time.

In valuing the gift, the IRS assumes your home is worth less than its present-day value since your children won’t take possession of it for several years. The longer the length of the term of the trust, the less the value of the gift or the value home is, in this case. If you die before the time you stipulated in the trust, the full market value of your house at the time of your death will be counted in your estate. In order for the trust to be valid, you must outlive it. At that time you must either move out of your home or pay your children fair market rent to continue living there. While that may not seem ideal, the upside is that the rent you pay your children for continuing to live in your home will reduce your estate further.

Irrevocable life insurance trust:

An irrevocable life insurance trust can totally remove your life insurance from the taxable part of your estate, help pay estate costs. It can also provide your heirs with ready cash for a variety of purposes. To remove the life insurance policy from your estate, you surrender ownership rights, which mean you, may no longer borrow against your policy or change the beneficiary.

In return, the proceeds from the policy may be used to pay any estate costs after you die. This in turn provides your beneficiaries with tax-free income.

That can be especially useful in cases where you leave heirs an asset such as a business that does not have any liquid assets. In today’s economy, the business may take a while to sell. In the meantime, your heirs will have to take care of operating expenses. If they don’t have the finances on hand to keep the business going and pay the bills they may have to let the business go. The money from an irrevocable life insurance trust may help to hold them over until a buyer comes forward.

Qualified terminable interest property trust (QTIP):

This trust gives you the ability to direct your assets to specific family members. This is particularly important if you have been married and have children and step children

This type of trust assures that there is equitable and fair distribution to your children and not someone else’s if you so desire.

It is important to educate yourself on estate planning and trusts and be prepared. Always contact an Elder Care Attorney in your area to help you with the laws that are specific to your area and state. This type of attorney is the best person to help you with estate planning and trusts that best suit your circumstances.

Learn about a Family Care giver Contract as part of  the Medicaid Spend Down process.