Many clients choose to transfer their home into a Medicaid Asset Protection Trust to gain protection from nursing home care spending. What clients often do not realize is that there is significant tax planning that accompanies the Elder Law planning. The proper Elder Law plan will consider not only the protection of assets from loss to long term care costs, but will also deal with potential income, inheritance and estate tax pitfalls. This nuanced tax planning can serve to save the client and their family tens of thousands of dollars in tax liability.
One of the key tax considerations associated with the transfer of the primary residence to an irrevocable trust is the preservation of the client/transferor’s primary residence capital gains tax exemption. We often use a special type of irrevocable trust, the Medicaid Grantor Trust, to preserve the use of the primary residence capital gains tax exemption of the parent or loved one transferring their home.
Many clients are living in their home when it is transferred to an irrevocable trust. However, they recognize that it is possible that they will move from and sell the property during their lifetime. If it is possible that the primary residence will sold during the lifetime of the grantor, we can structure the irrevocable trust as a Grantor Trust. If the client later moves from the property and that home is sold by the Trust, the client will still be able to elect the two hundred and fifty thousand dollar ($250,000) capital gains tax exemption.
The Grantor Trust status can be achieved in a number of ways by providing the person establishing the trust certain powers over the trust assets. Again, these powers are drafted with great care because we are dealing with two distinct goals and legal issues. On one hand, we are protecting the assets from nursing home spending. The PA Department of Public Welfare will be reviewing the application for Medicaid and the Trust language. Therefore, the Trust creator cannot retain too much power or the State might claim the contents of the trust are available for spending on long term care. On the other hand, we have to provide the client/Trust creator with just enough power so that the Trust can qualify for Grantor status. This is a delicate blend of legal issues that deserves proper legal advice and attention.
The decision to protect assets from nursing home spending via transfer to an irrevocable trust is not the end of the planning story. In many cases, it is just the beginning. The Medicaid Asset Protection Trust can be written in a variety of ways and should be tailored to a client’s particular needs. Included among those needs should be the review and addressing of income tax considerations. The capital gains tax issue reviewed in this article is but one of the important tax issues we discuss with clients on a daily basis.
To review the use of the Medicaid Asset Protection Trust in your particular case, please call Douglas L. Kaune at 610 933 8069 or email him at dkaune@utbf.com. We will work with you to develop the best comprehensive possible for you or your loved one.
