Posted by: BlogMaster | January 23, 2012

The Good News about Medicaid Trusts

Good news: New York State’s expanded estate recovery against life estate deeds and other assets owned by the Medicaid recipient or their spouse, even if there is a joint owner or beneficiary, will not affect the legality of planning to preserve assets with an irrevocable living trust (Medicaid Trust).

Irrevocable living trusts enable you to transfer your assets to the trust; legally shelter trust assets from Medicaid claims or recovery after your death; and permit Medicaid benefits to be paid during your or your spouse’s lifetime if the penalty of 5 years has expired. Note that for home care only, there is currently no penalty for transfers made to qualify for home care.

When properly done, the irrevocable trust also:

  • Retains real estate tax reductions;
  • Provides a sound method for management of trust assets without the risk that an adult child or other beneficiary might jeopardize your assets due to their divorce, bankruptcy, or other creditor issues;
  • Minimizes capital gains income tax on the sale of trust assets with a step up in tax basis following your death under current tax law; and
  • Distributes trust assets after your death without the expense of probate.

Under the expanded estate recovery rules, the principal of the trust is protected from recovery after the death of the trust owner/beneficiary or their spouse.  If the trust document distributes ‘income’ to the senior beneficiary, Medicaid is now permitted to recover against accumulated income.  

However, all Medicaid recipients in a nursing home or receiving home care are required to receive and pay over income from all sources – including a trust – towards the cost of their care, with Medicaid paying the balance.  Thus, the likelihood of income accumulating in the trust and subject to recovery would be a small burden.  And, if a home has been transferred by deed to the irrevocable living trust, and is not used as a rental property, there may be no accumulated income at all for recovery. 

In other words, the best option for preserving the largest asset you may own – for many seniors this is their home – is an irrevocable living trust.

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