People often wonder about the value of using irrevocable trusts in Medicaid planning. Certainly gifting of assets can be done outright, not involving an irrevocable trust. Outright gifts have the advantages of being simple to do with minimal costs involved.
So, why complicate things with a trust? Why not just keep the planning as simple and inexpensive as possible?
The short answer is that gift transaction costs are only part of what needs to be considered. Many important benefits that can result from gifting in trust are forfeited by outright gifting. These benefits are what give value to using irrevocable trusts in Medicaid planning.
Key benefits of gifting in trust are:
- -Asset protection from future creditors of beneficiaries. Preservation of the exclusion of capital gain upon sale of the Settlors’ principal residence (the Settlor is the person making the trust).
- -Preservation of step-up of basis upon death of the trust Settlors o Ability to select whether the Settlors or the beneficiaries of the trust will be taxable as to trust income.
- -Ability to design who will receive the net distributable income generated in the trust.
- -Ability to make assets in the trust non-countable in regard to the beneficiaries’ eligibility for means-based governmental benefits, such as Medicaid and Supplemental Security Income (SSI).
- -Ability to specify certain terms and incentives for beneficiaries’ use of trust assets.
- -Ability to decide (through the settlors’ other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the settlers die.
- -Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries.
- -Possible avoidance of need to file a federal gift tax return due to asset transfer to the trust.