Medicaid and Long Term Care Planning
The Irrevocable Medicaid Shelter Trust
Shield assets from the reach of Medicaid and the cost of long term care. Keep and Stay in your home. Maintain control over the Irrevocable Trust. Retain power to control trustees. Retain power to change beneficiaries. Avoid unnecessary tax burdens with retention of a stepped up basis in the home and other assets. Access to the equity in your home while not exposing it to Medicaid. Make life time gifts to family and charities. Provide protection for your spouse. Preserve an inheritance for your children.
Let’s start with the simple truth, that we are all getting older. No debate about that and as such our needs for assistance with self-care and independent living grows with our age. Long Term Care needs vary, but many of us will require care and assistance with basic task we take for granted, including eating, bathing, dressing, using the toilet, getting in and out of bed and around the home. Additionally, meal preparation, medication management, finances, shopping for essential and other tasks become increasing difficult for many. It has been reported that for those over the age of 65, 36% report having a disability in Massachusetts and that 25% of those elderly individuals need assistance with the basic activities of daily living. The numbers are growing every day.
Long Term Care may be provided at home or provided by a nursing facility. Most of us would prefer to remain in our homes as long as possible, but nursing home facilities play an ever increasing role in the care of the elderly.
The cost associated with Long Term Care can be staggering. Nursing home facilities costs throughout Massachusetts range from $5,000 to $15,000 and more per month.
So who pays the bill? Roughly 20% of long term care is paid out-of-pocket by the individual or family of the individual needing care. About 7% all needing care and could afford and qualify for long term care insurance rely on private insurance to cover the cost of their care. Medicare pays roughly 20% of long term care cost, but Medicare only covers the first 100 days of long term care. At least 50% of all cost associated with long term care is paid by Medicaid.
Medicaid is a need base program that will cover the cost of long term care, but first you must exhaust all but $2,000 of your assets on your care before Medicaid kicks in. An extended stay could easily wipe out a lifetime of accumulated assets. Unfortunately, many of the elderly are depleted of much needed assets and financial security they once enjoyed to care for themselves or their spouse and an inheritance to their loved ones.
What can be done to avoid a devastating depletion of your assets?
Plan as early as possible! Medicaid has a five year look back on transfers of assets whether out right gifts or transfer to trust. All assets properly transferred over five years past are not considered countable assets when applying for Medicaid benefits. As with most things in life, a plan put in place in advance can go a long way in eliminating the financial burdens of long term care and preserve assets. Many tools may be used to shelter your assets from high cost of nursing care, including gifting to love ones before you get sick; creating a life estate in property; annuities; and long term care insurance. However, they are all best utilized if done early. This article will focus on the Irrevocable Trust and for most our largest assets the primary home.
It is settled law that, properly structured, self-settled irrevocable inter vivos trust may be used to place assets beyond the settler’s reach and without adverse effect on the settlor’s Medicaid eligibility. See, Guerriero v. Commissioner of Div. of Med. Assistance, 433 Mass. 628, 629-632 (2001).
Most practitioners are aware of the shield an Irrevocable Trust can provide to assets from Medicaid, but fail to understand the additional far reaching consequences of the transfer of trust and how to avoid the many pitfalls. Landmines in waiting include: Disasterous tax consquences; Lack of grantor control over the trust; and no access to equity in a home transferred to trust.
Grantor control over the trust. For most, just the word irrevocable causes apprehension when considering transferring assets and their home into trust. "I have to give away my home?" "My trustee/children will tell me what to do with my home?" "Can I be told to move out?" "What if I want to sell my home and move?" "What if I need access to the equity in my home?" " What if I change my mind on who will inherit my property?" Yes, an irrevocable trust is irrevocable and a grantor must transfer ownership of the asset to the trust for good. For many, the largest asset to be irrevocably transferred is the home and most don't want to "give up" the home. It is just an unsettling notion. That is where an attorney who understands these concerns and understands the full depth of the law can alleviate them with a well drafted instrument. Grantor control should include:
- Power to Remove and Replace Trustees. An irrevocable trust must include language that retains in the grantor the power to remove and replace trustees. Just think of the power that language provides to the home owner. Say the grantor wants to sell the home and move, but does not get cooperation from the then acting trustee, the grantor simply replaces said trustee with a willing one. The grantor needs no cause, he or she can simple remove and replace the trustee. Simple and powerful language that provides the grantor power over the trust, but does nothing to degrade the trust purpose as a shield from Medicaid.
- Power to Alter and Amend the Beneficial Interest of the Trust. An irrevocable trust should include language that retains in the grantor the power to amend the beneficial interest of the trust. That is, to be able to change who is to take the trust property at the grantor’s death. Life changes and needs of love ones shift through the course of a lifetime. Grandchildren, disability, a child’s divorce, or winning the lottery can alter a grantor’s desires to whom he wishes to leave his property. A well drafted irrevocable trust will allow the grantor the power to alter the beneficial interest as he/she sees fit and at the same time stand up to Medicaid scrutiny.
- Power to Make lifetime gifts. Why wait until one passes before making gifts to children or grandchildren. Say A granddaughter has been excepted to a prestigious university and the grantor would love to help pay the way. A well drafted irrevocable trust can allow for the lifetime gifts to or on the behalf of loved ones and or charities.
To provide protection from Medicaid or any other liability a trust must be irrevocable and restraints on the grantors access to principal must be total, but with the correct language an irrevocable trust can be flexible and can afford the grantor great powers over it.
TAXES. Capital Gains Taxes. "What the point of saving the asset from Medicaid if the IRS will get it in the end?" Stepped Up Basis. Generally, a heir’s basis in inherited property is not what the decedent initially paid for the asset, it’s "stepped up" to the asset’s value as of his date of death, and this can make a big difference. This stepped up basis applies to all inherited assets, including stocks, bonds, and real estate, but assets received through a trust are not inherited, rather they were gifted and gifted property retains the grantors tax basis (or the original cost). This is where many Trusts blow it and create an unnecessary tax burden for the children of their clients. The shortsighted fail to include language in the irrevocable trust that will preserve the stepped up basis. A knowing attorney will avoid the loss of the tax benefit, all the while expanding the grantor's control over the trust assets and shielding the underlying assets from the reach of Medicaid.
Home Equity. Reverse Mortgage. The largest asset of many of us is the home. More specifically, the equity in the home and equity in the home can only be accesses by selling the home or by granting a mortgage. A home held in an Irrevocable Trust can be sold, but what if you chose to stay at home. Is there any way to access the home equity? Conforming traditional mortgage underwriting guidelines simply do not permit it in most cases. However access to home equity is allowed via a home equity conversion mortgage (or reverse mortgage). The U.S. Department of Housing and Urban Development (HUD) allows the underwriting of reverse mortgages and access to home equity when the underlying property is held in an irrevocable trust. Further, it allows the transfer of a home that is all ready subject to a reverse mortgage to an irrevocable trust. No irrevocable trust should be drafted that does not provide this power to access home equity. Whether the grantor of the Trust intends to obtain a reverse mortgage or not, it is essential that the option to do so is preserved by the Trust instrument. To be clear, Medicaid guidelines on assets/income of Medicaid applicants specifically identifies "Money received from a loan secured by the equity in the home of an individual who is aged 60 or older (reverse mortgage)" as Non-countable income and as such does not interfere with the benefit eligibility of Medicaid.
The risk of long term care is becoming an increasing probability for all of us and the cost of said care can expose your loved ones to great economic hardship and loss of a legacy. With timely planning and a well drafted instrument the needs of a client and avoidance of unintended consequences can be achieved.
It starts with education. Consult a truly knowledgeable attorney who can advise you on the best way for you to plan for long term care and if an Irrevocable Trust will meet your goals.