What is a Medicaid Asset Protection Trust? It is an irrevocable trust that (if drafted properly) protects the assets transferred to it from counting as resources for Medicaid qualification purposes. When the Trust is signed, a new legal entity is created. There are four major roles in the trust: Grantor, Trustee, Beneficiary, and Trust Protector. The Grantor is the creator of the Trust and the person transferring assets into the Trust. The Trustee manages the trust, makes decisions regarding the use of trust assets and makes distributions pursuant to the terms of the trust. A Distribution Trustee is not necessarily in every one of these trusts, but is recommended in order to split off the duty of making distributions from the other Trustee duties. The beneficiary is the person who benefits from the trust. There can be two types of beneficiaries: income beneficiaries, who are recipients of trust income, and the principal beneficiaries, who are the recipients of distributions of trust principal. Lastly, the Trust Protector is responsible for protecting the purpose and intent of the trust in the event of changes in the law.
How does this affect the five year look-back? It is very important that when the Trust is created, assets are transferred into the name of the Trust. The transfers made into the Trust are subject to a 60-month lookback period for Medicaid eligibility purposes. Therefore, depending upon the amount of assets used to fund your Irrevocable Trust and other factors relating to Medicaid eligibility as required by the Deficit Reduction Act of 2005 and Pennsylvania law, you might not qualify for Medicaid benefits for a full 60 months after the month in which your Irrevocable Trust is funded.
What types of assets can be transferred into the Irrevocable Trust? Generally, real estate, certificates of deposit, checking accounts, savings accounts, non-qualified annuities, stocks, bonds, mutual funds, money market accounts and life insurance can be transferred. The only asset that really should not be transferred to the trust would be any qualified funds, such as, IRAs, or 401Ks because there would be income tax consequences and those accounts must be held in the name of the individual who created the account.
Can I sell my home if it is owned by this trust? In order to transfer real property into an Irrevocable Trust a new deed must be executed and filed at your County Courthouse. Once the deed has been changed, the Trustee has the ability to sign all necessary paperwork to sell your home. Assuming the trust has the appropriate terms and is considered a Grantor Trust for Federal Tax purposes, when your primary residence is sold you can still use your capital gains exclusion if you otherwise qualify for that exclusion.
Can the Grantor get money out of the trust? The Grantor cannot be a principal beneficiary of the Trust because then the assets would be considered available for Medicaid purposes. The terms of the trust and your goals will determine whether or not the Grantor will have access to the income generated in the Trust.
How does the Trust work after I pass away? Assets owned by the Irrevocable Trust will not be controlled by the Grantor’s Last Will and Testament, but instead will have its own terms that will determine how assets pass. It would be very similar to your Last Will and Testament in that it determines how your property should be distributed when you pass and who would be in charge; however, it would avoid the probate process.
Will it affect my eligibility for a Continuing Care Retirement Community (“CCRC”)? This is a difficult question to answer because it depends on many things. Each CCRC has its own rules and factors they consider when determining if they will accept an applicant. Generally, the CCRC will assess the applicant’s income, assets, long term care insurance, gifting, and potential for future assets and income. Some CCRCs specifically talk about Irrevocable Trusts and will work with you to have important parties sign off so that you will be eligible for that CCRC.
How are the typical bills paid for the Grantor’s primary residence that is owned by the Trust? It depends on the terms of the trust. Typically, the Grantor will pay the bills (utilities, taxes, maintenance, etc.) as they normally would. Usually a tenancy agreement is completed between the Trustee of the Trust and the Grantor so that the Grantor can lease their residence from the trust. In lieu of rent, the Grantor pays for the ordinary household bills.
How are funds in the Trust accounted for? No extraordinary record keeping or accounting must occur; however, the Trustee should keep statements for the trust assets so that the Trustee has an understanding of the value of the assets in the Trust and outside of the Trust.
Do I have to file a separate income tax return? Any time a separate legal entity is created, a tax preparer should be consulted in order to make sure that everything is filed appropriately. If the trust is a Grantor Trust for Federal Tax purposes, then a separate federal return would not be necessary; however, the tax preparer would be able to assess if a separate form was needed for Pennsylvania income tax purposes.