Drafting Income-Only Trusts for Medicaid Eligibility and Tax Planning

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Drafting Income-Only Trusts for Medicaid Eligibility and Tax Planning Navigating Look-Back, Grantor Trust, Basis and Gift Tax Rules THURSDAY, JULY 31, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Joley L. Eason, ThompsonMcMullan, Richmond, Va. Judith D. Grimaldi, Partner, Grimaldi & Yeung, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Drafting Income-Only Trusts for Medicaid Eligibility and Tax Planning Joley L. Eason ThompsonMcMullan PC

6 Irrevocable Income-Only Trusts (IIOT) Self-Settled- created by Medicaid applicant or applicant s spouse Trust Assets Income-Producing (CDs, Stocks, Rental Property, Mineral Interests) Non-Income Producing (Primary Residence) 6

7 Objectives of Income-Only Trusts Control Flexibility Protection Tax Savings 7

8 Advantages Preserve assets/exempt for Medicaid after lookback period Protect assets against potentially catastrophic costs of longterm health care Pass estate to heirs Minimize tax liability Retain control over assets and avoid risks associated with outright gifts Right to income/source of continued income Right to use, live in, sell real estate and purchase other real estate from any proceeds 8

9 Risks Estate recovery Right to elect against spouse s estate Depends on how state defines estate (probate/non-probate) Irrevocable No Access to Principal 9

10 Common Types of Trust Assets Income-Producing (CDs, Stocks, Rental Property, Mineral Interests) Non-Income Producing (Primary Residence) 10

11 When to Use Income-Only Trusts? Depends on client and individual situation Generally advantageous when: Long-Term Care Planning for married couples with differing degrees of health and income Long-Term Care Planning for married couples where both enjoy good health Long-Term Care Planning for married couples who don t anticipate the need for long-term health care for at least five years Trusts established for the non-institutionalized/community spouse of a Medicaid recipient 11

12 When NOT to Use Income-Only Trusts? Crisis planning where client will long-term care in the immediate future Long-term care planning for clients who have relatively limited resources Long-term care planning for clients who earn substantial retirement and live/plan to move to states that impose an income cap for Medicaid eligibility (ie Colorado, Georgia) 12

13 Alternatives Outright gifts to children Increased tax liability Expose assets to risks from creditors, marital difficulties, addictive behaviors Lack of control 13

14 The Five-Year Lookback Period The Deficit Reduction Act of signed into law February 8, Sets forth restrictions and penalties on asset transfers for individuals applying for long-term care Medicaid. Extended lookback period Changed beginning date of penalty period 14

15 The Five-Year Lookback Period Penalty period imposed for outright transfers or transfers to a trust after February 8, 2006 Penalty period or disqualification begins when the applicant is both financially eligible for Medicaid and receiving institutional level of care No maximum or cap on the period of ineligibility 15

16 The Five-Year Lookback Period Penalty periods imposed for all uncompensated transfers. May exclude minimum amounts like $1,000 or $2,000, depending on the state. The amount of the uncompensated transfer is divided by the average cost of nursing home in the jurisdiction in which the applicant is a resident. Example : $60,000 transfer / $6,000 (average cost of facility) = 10 month period of ineligibility 16

17 The Five-Year Lookback Period The major provisions which affect long-term care Medicaid: Medicaid s look back period for all assets is 5 years. The penalty period for transferred assets begins when individual has applied for Medicaid and is otherwise eligible. Annuities, IRAs, Promissory Notes- may be exempt, depending on the state and if certain requirements met 17

18 Impact of the Affordable Care Act For states that have passed Medicaid expansion, individuals and families who were previously ineligible for Medicaid may now be eligible. ACA uses modified adjusted gross income (MAGI) to determine eligibility for Medicaid. Family of 4 with income of $94,000 meet the financial eligibility requirements. For this newly eligible group, there are no resource restrictions (this does not apply to long-term care Medicaid.) Medicaid resource limits and transfer of asset rules still apply for longterm care Medicaid. ACA eliminated the pre-existing condition eligibility restrictions that previously precluded sick or disabled individuals from enrolling in private plans. Disabled individuals may now be eligible for a private plan, as well as a subsidy, and disenroll from or forego applying for Medicaid. Individuals enrolled in both Medicare and Medicaid are not eligible for a subsidized or private plan in the Health Insurance Marketplace. 18

19 Income Only Trusts in Medicaid Planning Judith D.Grimaldi, Esq. 19

20 Use of Trusts in Medicaid Planning In transferring assets trusts are the recommended strategy to protect assets. Types of Trusts: Revocable- not used in Medicaid planning except by refusing spouse to avoid probate Irrevocable Used for asset protection Special Needs Discretionary Sole benefit This CLE will focus on the income only asset protection trust 20

21 Trusts vs. Direct Transfers Trust advantages Death Disability Debts Divorce Tax benefits Real estate discounts Grantor income tax status Capital gains advantages Direct Transfers Simple, less cost Greater liability issues Less control Less creditor protections Inability to fix who will inherit Limited flexibility if there is a change in plans 21

22 Drafting Trusts - Types Medicaid Irrevocable Income only Grantor Trust Third party must be appointed trustee not Grantor Income may be payable to grantor or Grantor s spouse or issue No principal distributions to Grantor Can remain includible in Grantor s estate through retained interests, LPOA, etc. to secure capital gains protections stepped up in basis 22

23 Grantor Trust Rules for Income Tax Benefits Grantor trust status allows income to be taxed at the Grantor s usually lower tax rate Income tax liability remains with the Grantor Trust tax rate - income of $11,150. (39.5%) How to achieve Grantor status Retain interests Medicaid cautions 23

24 Grantor Trust Options Power to: Substitute property of equivalent value (IRC 675(4). Medicaid caution Designate Charitable Beneficiaries Add beneficiaries (IRC 674(b)(5)) Use Trust Income to pay for Life Insurance (IRC 677(a)(3) Borrow w/o Security (IRC 675(2). Medicaid caution Receive income or any trust assets including a life use only. May not be discretionary or need approval of adverse party. IRC 677 (a) (1) Use individual rather than grantor to exercise these powers to avoid Medicaid implication 24

25 Trust Tax Issue- LPOA Limited Power of Appointment drafting requirements and Tax issues What is a LPOA ( Testamentary and Life time) IRC 674(b)(iii) provides a Limited POA will provide: Step up in basis on Grantor s death under IRC 1014 Grantor Trust Status to apply to Income and Principal allowing use of individual s income tax rates The 121 capital gains exclusion on sale of residence Incomplete gift for tax purpose if both life and testamentary powers are included BUT Medicaid will not consider the trust assets since the assets are no longer available to the Grantor 25

26 Tax Issues Inclusion in Taxable Estate? When are trust assets includible in Grantor s estate: Grantor retains a life interest/ life estate, or 5% or plus reversionary interest. IRC 673 Or a power of appointment. IRC 674, or Any type of interest which would trigger federal estate tax inclusion (IRC Sections Retained Life Estate,2037, Revocable Transfers) 26

27 When Trust Holds Residence Residences in trust drafting considerations: Include life use, residency or tenancy May result in a title in equity to the real property Allow Trustee to take actions to preserve and maintain the property in addition to the life tenant Life tenancy can allow retain any VA or Senior Citizen real estate tax discounts or exemptions. What if property to be transferred is subject to a mortgage Consult state law to ask can lender exercise due on sale clause if the borrower is beneficiary with residency rights 27

28 Trust Drafting Cautions Caution Power of Appointments Risk if individuals who serve as Trustees and Beneficiaries with the full power to administer an irrevocable trust could be considered a to have a General not limited Power of Appointment resulting in the trust assets included in the Trustee s estate. To avoid this Limit lifetime distributions to HEMS or have an only the independent Trustee make distributions to the Trustee. 28

29 Income Tax Issues for Trusts Trust income tax returns Trust can be a separate tax payer Irrevocable Medicaid trusts need EIN s. SS number of Grantor should not be used. File separate fiduciary tax return (1041) reporting all income whether distributed or accumulated. Issue a K-1 to Grantor or all beneficiaries listing the share of income, deductions, and credits distributed 29

30 Drafting Articles on Distribution of Principal In a Grantor trust no access to principal Third Party trusts and SNTs can give Trustees discretion to use trust assets for the benefit of the Medicaid Applicant or Recipient Sole Benefit and Spendthrift trusts are another form of discretionary trust but use caution in use of trust assets for Medical care. 30

31 How to Provide Access to Principal If Needed Establish a class of beneficiary to whom the trustee may distribute principal Back door access Avoid distribution to minors if trust may need to be amended or decanted Provide for independent trustee to allow distribution to family member or individual who is serving as trustee 31

32 Drafting Distributions at Death No particular Medicaid requirement: Income only Grantor trust may distribute the same as a Last Will. Can include credit shelter and tax provisions Exceptions: SNT first party must have pay back Sole benefit trust must be made payable to the estate. 32

33 Trustee Provisions Recommendations on Trustees: If family member to serve as Trustee provide for appointment of independent Trustee or Co-Trustee. Provide for appointment of authorized trustee for decanting Provide for successor trustee Consider whether the Trustee may act individually 33

34 Special Trust Clause Consider putting SNT as a default provision for all beneficiaries who may be disabled Consider trusts for drafting around minor children and grandchildren. Consider inserting flexibility into draft to make amendments or emergency revocation possible if eligibility is needed before the 5 year look back period. 34

35 GRIMALDI & YEUNG LLP 9201 Fourth Avenue, 6 th Floor Brooklyn, New York Fifth Avenue, 6 th Floor New York, New York (718) jgrimaldi@gylawny.com 35