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What Is It?

What Is A Transfer In Trust?

If your primary concerns are to qualify for Medicaid and preserve your principal residence for your loved ones, it's important to understand the concept of a trust and to consider the use of various trusts. In this discussion, a transfer in trust refers to a particular Medicaid planning tool, the irrevocable income-only trust, which may, in some circumstances, be used to protect your principal residence and facilitate your eligibility for Medicaid. In general, a trust is a legally enforceable arrangement that allows the creator of the trust (the grantor) to transfer property to someone (the trustee), who holds the property for the benefit of someone else (the beneficiary). There are many variations on this theme; for instance, it is perfectly acceptable for you to be both the grantor and the beneficiary of a particular trust.

A revocable trust is created if the grantor wants the ability to change the terms of the trust at any time or to terminate the trust at will. In the Medicaid context, however, revocable trusts are ineffective. If you can revoke your trust, you retain sufficient control over the assets therein and they are accessible to you, in the eyes of the Medicaid authorities. If you use a trust for Medicaid purposes, it must be irrevocable.

An irrevocable trust should be established if the grantor does not want (or can't have) the ability to alter the terms of the trust. In Medicaid planning, two types of irrevocable trusts are generally used -- irrevocable income-only trusts and irrevocable trusts (in which the creator is not a beneficiary). In this discussion, however, we are concerned with preserving your principal residence, not a second home or other assets; therefore only the irrevocable income-only trust shall be reviewed. As a Medicaid planning tool for preserving your principal residence, an irrevocable income-only trust provides benefits similar to the transfer subject to life estate. Unfortunately, in contrast to the life estate arrangement, the transfer of your residence to the trust will currently create a 60-month look-back period--more on that later.

Briefly, an irrevocable income-only trust is an arrangement whereby you transfer your principal home to someone else (the trustee), who holds the property for you, the beneficiary of the trust. You are entitled to receive only the income (if any) that the trust may generate. You cannot access the trust principal.

How Is This Useful As a Medicaid Planning Tool?

To qualify for Medicaid, both your income and the value of your other assets must fall below certain limits, which vary from state to state. An irrevocable income-only trust helps you to qualify for Medicaid by making one of your largest assets, your house, inaccessible to you. Assets that are truly inaccessible to a Medicaid recipient cannot be considered, so in the case of an irrevocable income-only trust, the trust principal (but not the trust income) will not be counted.

As for the trust income (if any), most of it must be spent down to subsidize your nursing home care; Medicaid will pay the rest. Trust income would exist if you had a two-family home and rented the upstairs, for example, or if you deposited savings accounts and other assets into the trust.

Of course, along with helping you to qualify for Medicaid, an irrevocable income-only trust helps you to preserve the house for your children or other loved ones. Because the house is not part of your probate estate, certain states will not be able to go after the asset under a theory of estate recovery.

Caution: Some states have adopted an expanded definition of estate to include nonprobate assets in which you hold an interest at death. With respect to an income interest, these states may be able to force a sale of the house after your death to collect the present value of your income interest at the time of your death as reimbursement for the Medicaid benefits.

Caution: Seniors and their families should take no action without consulting a knowledgeable elder law attorney.

Will Such A Transfer Create a Period of Ineligibility for Medicaid?

Medicaid planning is best done before your entry into a nursing home becomes imminent, and establishing a trust is no exception. This is because a transfer into trust, like any transfer of assets for less than fair market value, can create a waiting period or period of ineligibility before you can qualify for Medicaid. When you apply for Medicaid, the state has the right to review or look back at your finances (and those of your spouse) for a period of months before the date you applied for assistance. For transfers made on or after February 8, 2006, the look-back period is 60 months.

Briefly, this means that if you transfer your house into the trust within 60 months of the time you apply for Medicaid as a nursing home resident, you will be ineligible to qualify for Medicaid for a period of months based on a formula set by the state. This formula may be explained as the fair market value of the house at the time of transfer divided by the average monthly cost of nursing homes in your locale, the quotient being the number of months for which you will be ineligible to receive Medicaid benefits.

Example(s): Assume that Ralph transferred his $288,000 two-family home to an irrevocable income-only trust, naming himself as beneficiary, and his son as trustee. Although Ralph is entitled to receive all of the income generated by the trust, he is precluded from receiving any principal. Two years later, Ralph entered a nursing home in a state where the average monthly cost of a nursing home is $6,000. Because Ralph transferred assets to an irrevocable trust during the 60-month look-back period, he will be ineligible to receive Medicaid benefits until 48 months have elapsed ($288,000 divided by $6,000 equals 48 months).

In the above example, if Ralph had established the trust at least 60 months before he entered the nursing home, he would have avoided the ineligibility period (since the transfer would have occurred prior to the 60-month look-back period).

What If You Are Married?

With respect to the family home, a transfer of the house between spouses is allowable. It is not subject to a look-back period or to any other penalties. Therefore, if a husband becomes institutionalized, he can deed his interest in the house to his wife so that it will stand in her name alone. She can then create a will, naming her children, or anyone other than the institutionalized spouse, as beneficiaries. This strategy may be the preferred method if a husband and wife have no time to plan and one spouse is about to enter a nursing home. If you're single or if both parties expect to enter nursing homes in the future, then an irrevocable trust should be considered, along with other options.

When Can It Be Used?

You Want to Qualify for Medicaid and Preserve Assets for Your Loved Ones, and You Anticipate the Need for Long-Term Care

Because a transfer of your house to an irrevocable trust can create a waiting period or period of ineligibility before you can qualify for Medicaid, a transfer in trust should be effected long before entry into a nursing home seems imminent. If not, you may find yourself without the necessary funds to pay your nursing home bills before Medicaid kicks in. In general, however, a transfer in trust is an effective Medicaid planning tool for preserving your home and helping you to qualify for Medicaid. Bear in mind, though, that some states have an income-cap requirement that forbids a spend-down of income. In such cases, if money received from the irrevocable income-only trust exceeds the income limit by even one dollar, an applicant could be considered ineligible to receive Medicaid benefits. One solution might be to employ a straight irrevocable trust (in which the creator of the trust is not a beneficiary), rather than an irrevocable income-only trust, if you are a resident of one of these states.

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Helps You Qualify for Medicaid

A transfer in trust helps you to qualify for Medicaid by making your home unavailable to you (and, therefore, to the state) for purposes of Medicaid eligibility. The value of the house is eliminated from your financial picture. As long as you effect the transfer well before entering a nursing home and applying for Medicaid, you will not be subject to a Medicaid ineligibility period.

Provides a Present Income Stream in Some Cases

If you're the owner-occupant of a two-family home, access to a present income stream is certainly an advantage of an irrevocable income-only trust. Because such a trust is often established long before entry into a nursing home, it is often necessary to possess a sufficient flow of income during the interim for normal living expenses. Unlike straight irrevocable trusts (in which the creator is not a beneficiary), the income-only version provides this flexibility.

Specifies Where Trust Principal Goes After Your Death

The ability to specify what happens to trust principal at your death (appointing principal) is also an important feature. When you establish the trust, you decide who the income beneficiaries will be (after careful consideration of all options). For instance, you could name yourself and one of your children as present beneficiaries. Additionally, you can specify what happens to the trust principal (the house) at your death. This ability to control the house after your death is an important feature to most people. Of course, because this instrument is an irrevocable trust, your decision generally can't be changed once the trust has been established.

Avoids Probate

Probate can be expensive, time-consuming, and often involves hiring an attorney. By employing such tools as gifts, trusts, and life estates, you may avoid these problems.

Prevents Transfer of Residence to Trust from Being Subject to Gift Tax

If you transfer your residence to the trust subject to a so-called special testamentary power of appointment, the transfer may not be subject to gift tax. With a special testamentary power of appointment, you include a provision in your trust document reserving the right to name in your will those people (from among a specified group, such as your children) who will receive the house upon your death. According to federal gift tax regulations, you have not made a completed gift of the property at the time of the transfer into trust if you reserve the right to determine who will receive your property at some later time.

Provides Your Loved Ones with a Stepped-Up (or Stepped-Down) Cost Basis, In Some Cases

Because you retain ultimate control over the house when you reserve a special power of appointment in your trust document, and include other provisions to make the trust a grantor trust, the full value of the trust is included in your estate for federal estate tax purposes. For income tax purposes, your children (or to whomever you transfer the property) are treated as though they inherited your property. In other words, in determining their capital gain on a later sale of the property, your recipients of the property can use the fair market value of the property on your date of death as their basis.

Example(s): Assume James paid $70,000 for his home 25 years ago. He established an irrevocable trust two years ago, naming himself as the present income beneficiary and his son, Kirk, as the remainder beneficiary (Kirk would get the house after James dies). James included a special power of appointment in the trust document, but never exercises it. When James dies, the fair market value of the house is $260,000. If Kirk sells the house for $260,000, there will be no capital gain, since Kirk's basis in the home is stepped-up to the value of the home at the time of James' death ($260,000).


Transfer Into Irrevocable Trust Triggers Ineligibility Period

A transfer in trust, like any transfer of assets for less than fair market value, can create a waiting period or period of ineligibility before you can qualify for Medicaid. This period, known as the look-back period, is 60 months. If you establish an irrevocable trust and suddenly become ill before the end of the waiting period, you will be left without the necessary funds to pay your nursing home bills. Medicaid will not cover your costs in the meantime. For this reason, it is advisable to keep some assets out of the trust and/or purchase long-term care insurance to cover yourself during the waiting period.

Loss of Control Over House

The trust must be irrevocable in order to be an effective Medicaid planning tool. This means that once you have designed the trust provisions and transferred your house into the trust, you have no further control over the house and are powerless to get it back. This can be a serious problem if you establish the trust many years before you enter a nursing home, because the assets in your trust will be indisposed indefinitely. For this reason, it is probably not a good idea to transfer all your assets into the trust.

May Be Ineffective In an Income-Cap State

If your home was an owner-occupied two-family residence or if the amount of periodic income (in general) you receive from an irrevocable income-only trust is high, your trust might be ineffective in an income-cap state where Medicaid eligibility is restricted to those persons who have income below a specified amount. If you live in such a state, you will be ineligible to receive Medicaid benefits if your monthly income exceeds the threshold. In non-income-cap states, on the other hand, your eligibility would not be precluded. You would simply spend down the excess income on your medical care.

House May Be Subject to Medicaid Estate Recovery Procedures

Although an irrevocable income-only trust can often preserve assets for your loved ones when you die, this is not the case in every state. After you die, federal law allows states to seek reimbursement from your estate for Medicaid payments.

For Medicaid purposes, the word "estate" has traditionally been construed by most states as your probate estate; that is, it refers to those assets that will pass by your will, not by beneficiary designation or operation of law. Some states, however, have adopted expanded definitions of estate that include all nonprobate assets as well, to the extent of your legal interest in such assets at the moment before your death. If you are the income beneficiary of an irrevocable income-only trust, the state could (in some cases) force a sale of the home after your death and collect the present value of your income interest at the moment before your death as reimbursement.

How to Do It

If you are interested in a transfer in trust, there are a number of steps you should follow:

Gather Your Medicaid Eligibility Information Before Consulting An Attorney Or Other Financial Advisor

  • Prepare a list of all your assets (and those of your spouse), indicating how title is held, the tax basis, how much you paid for the asset, and the present fair market value.
  • Prepare a list of your (and your spouse's) income from all sources.
  • Indicate whether your resources are, for Medicaid purposes, exempt, nonexempt, or inaccessible.
  • Prepare a list of all assets transferred within the last five years, by way of gift, trust, life estate, or otherwise. Indicate date of transfer, transferee, purpose, and consideration (what you received in return).

Consult a Medicaid Law Attorney

In recent years, the Medicaid laws have undergone a number of changes. Indeed, because certain planning vehicles have been eliminated and most rules tightened, it is reasonable to expect that further changes will occur in the years ahead. If you are interested in planning, it is vital that you consult with an attorney experienced with Medicaid planning. An attorney will advise you of your options, make recommendations, and ensure that establishing an irrevocable income-only trust would be in your best interest.

Tax Considerations

Income Tax

Because an irrevocable income-only trust is a grantor trust, any income generated by the assets transferred to the trust is taxable to the grantor (creator of the trust), whether or not the income is distributed to the beneficiaries.

Estate Tax

Because you retain the right to receive income from the irrevocable trust during your lifetime, the full value of the trust property must be included in your gross estate for federal estate tax purposes.

Gift Tax

A special power of appointment provision gives the grantor the right to redirect trust property to other beneficiaries, but not back to the grantor or the grantor's estate. Therefore, if you include a special power of appointment provision in your trust, you may be able to eliminate any gift tax issues arising at the time the assets are transferred to the trust. This is an extremely complex area. You should consult an estate planning attorney.

Questions & Answers

If Income From an Irrevocable Income-Only Trust Is Paid to a Husband And Wife Jointly, Is It True That The Healthy Spouse Is Entitled Only to Her One-Half of The Income When Her Institutionalized Husband Applies For Medicaid?

That's true, but a planning opportunity exists in some states.

Tip: With respect to a married couple, an irrevocable income-only trust may provide that income be payable to a husband and wife until such time as one spouse enters a nursing home. At that time, the institutionalized spouse's income distributions cease and all the income shall be payable to the healthy spouse for life, and then to the survivor for life. Upon the death of both, the trust will terminate and the balance will be paid to the beneficiaries. There is usually no penalty for such an arrangement since transfers between spouses are generally permissible. Without such a provision, however, the healthy spouse may be entitled to only one-half of the income after her husband enters a nursing home and applies for Medicaid.

If You Expect to Enter a Nursing Home And Apply for Medicaid In Just a Few Years, and You Own a House That You Want to Transfer to Your Child, Would It Be Better to Use an Irrevocable Income-Only Trust or a Life Estate Arrangement?

It really depends on your circumstances since the advantages and disadvantages to these two planning tools are fairly similar. Both types of transfer would be subject to a 60-month look-back period. Therefore, establishing a trust or life estate within five years of your entry into a nursing home would make you ineligible for Medicaid for a period of months based on the fair market value of your house divided by the average cost of nursing homes in your area.

Bear in mind that both tools may be subject to estate recovery procedures, depending on your state. With respect to a life estate, for example, your state may be able to place a lien on your house after you die to collect the value of the life estate at the moment before your death.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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