Clients who want to protect assets from the expense related to the future need for long term nursing care choose to transfer some or all of their assets to a Medicaid Asset Protection Trust. The capital gains tax basis for assets transferred to the Medicaid Asset Protection Trust is a key consideration when determining how the Trust will be structured. If the assets gifted to the Trust have a low income tax basis, then we are likely to structure the Trust to be taxable in the grantor’s estate. This sounds counter intuitive.
Why would we want the assets to be taxed in the deceased grantor’s estate?
The reason is that beneficiaries will likely pay less tax if they pay the 4.5% Pennsylvania Inheritance Tax on the total value as of date of death as compared to the 15% or greater capital gains tax rate applied to the appreciation of the assets at the time the assets are sold. This is one example of how all irrevocable Medicaid Asset Protection Trusts are not created equal and how a slight modification could save or cost the family tens of thousands of dollars.
Be careful to work with experienced advisors who will watch out for these nuances even if they do not appear to be the main focus of the Medicaid and Nursing Home Planning.
