Medicaid Irrevocable Trusts: Frequently Asked Questions

We receive a lot of questions from families about the nuances of irrevocable trusts, to preserve assets and become eligible for MassHealth/Medicaid. The following are answers to common questions:

What is the Difference between a Revocable Trust and an Irrevocable Trust

A revocable trust can be changed at any time, and the people who set it up and administer it have complete control over the assets. An irrevocable trust can’t be changed, and the people who set it up do not have unlimited control over the assets. An irrevocable trust, however, can help people become eligible for benefits such as MassHealth, while a revocable trust doesn’t.

How Does a Medicaid Irrevocable Trust Work

When you place assets into your irrevocable trust, you give up control of the assets. Because you can no longer access the principal, it is no longer countable when you’re applying for MassHealth/Medicaid. There are other factors to consider for eligibility for benefits, however. For example, the value of the trust assets, the value of assets outside the trust, and how much time has passed since the transfers were made to the trust are all important considerations. There is a five year “look back” period for assets transferred to the trust.

Do I Receive the Income my Medicaid Irrevocable Trust Generates

Your trust may or may not allow the grantor to receive income from the trust. It’s important to discuss this with your attorney.

How Will Income from my Medicaid Irrevocable Trust Be Taxed

The trust can be drafted in such a way that the grantor is considered the owner for income tax purposes, without necessarily requiring income be distributed to the grantor. The trust should have a separate tax ID number and file an income tax return. All income, deductions, credits, etc. should also be reflected on the grantor’s tax return. Because the trust is a wholly owned grantor trust, it will not pay separate federal income taxes. These trusts can be drafted to be income tax neutral.

Do Trust Assets Receive a Step-up in Basis for Capital Gains Tax Purposes on the Death of the Donor

Yes, if the donor is deemed the “owner” of the trust assets for tax purposes, the assets will get a full step-up in basis at the death of the donor, thereby significantly reducing or eliminating capital gains taxes when the property is sold. This can be especially useful for real estate or other assets that have significantly increased in value over time.

Can Property Be Sold in the Trust

Yes, property in the trust can be sold but will stay within the trust.

Can I Continue to Live in My Home if I transfer it to a Trust

Yes, no special language is needed to ensure that. Additional safeguards can be included in the deed and trust.

Should I have One or Two Irrevocable Trusts

A donor who is single would only need one irrevocable trust. To satisfy other objectives, the trust will be includible in the gross taxable estate of the donor. If a married person has a taxable estate greater than $1 million, two irrevocable trusts should be considered to allow each person to maximize their estate tax exemption amounts.

Lastly, What About Qualified Accounts

Retirement account funds and other qualified plans cannot be transferred to these trusts during life. A strategic multi-year withdrawal might make sense depending on age and the value of the qualified accounts. If one spouse needs to qualify for the benefits and a community spouse does not, other more complex strategies are available, such as a single premium immediate annuity.

If you’ve been thinking about planning, or have been putting it off, reach out to us today to discuss your options at tim@tfranklaw.com