The gifting of assets in order to protect them from being spent on long term nursing care is a common Elder Law planning option. The initial decision to make gifts will be dependent on various factors including, but not limited to, the Medicaid gifting rules, the total assets of the person making gifts and the health of the person making gifts.
We urge our clients who decide to make gifts to protect assets to protect them from nursing home spending to make transfers to an Irrevocable Trust rather than outright to the individual beneficiaries. We refer to these trusts commonly as Medicaid Asset Protection Trusts. However, there are different ways to write the trust document depending on certain underlying factors. One of the factors is the tax status of the assets being transferred to the trust.
If you choose the Medicaid Asset Protection Trust as a vehicle for protecting your family assets from the ever rising cost of long term nursing care, be very conscious of the capital gains tax basis of the assets placed into the Trust. Your original tax basis is determined by the purchase price you pay for an asset. You can also increase the basis of certain assets, such as real estate, by making repairs or improvements. For demonstrations in this article, we will assume the tax basis for assets is simply the purchase price.
There is actually a tax benefit that results when a person owns assets that have appreciated significantly at the time of their death. This is called a step-up in basis. The basis for those assets is no longer the purchase price, but instead is the value as of the date of death. So, you see it might be advantageous to have appreciated assets taxed in your estate at death because of this step-up in basis. The benefit of having the assets included in your estate will further depend on the overall value of the estate, the need to pay a federal estate tax, PA Inheritance Tax Rates and the prevailing capital gains tax rates. This will be an important review point for your estate planning and accounting professionals, but it is important for you to know that there are different way to write the irrevocable trust and that these nuances could result in thousands of dollars of tax savings.
If you have assets that have not appreciated considerably, you are more likely to want the Nursing Home Asset Protection Trust to be structured in a way to avoid inclusion in your estate for Pennsylvania Inheritance Tax Purposes.
Examples of low tax basis assets are cash and homes or stocks that have not significantly increased in value. Although avoiding the PA Inheritance Tax may seem like the natural decision, as mentioned above, there are actually capital gains tax benefits to having highly appreciated trust assets included in your estate.
The issue of making a Medicaid Asset Protection Trust includable in the grantor’s estate will be very important. You must be very clear with the attorney when discussing the value of assets to be placed in trust as well as the purchased price and adjusted basis. This key information will allow the advisers to determine the best tax structure for your Medicaid and Nursing Home Asset Protection Trust and overall strategy.
Read this related article about gifting of assets that have appreciated in value and how to preserve the step-up in capital gains tax basis.
Please contact Douglas L. Kaune at 610 933 8069 or dkaune@utbf.com to review your case and to schedule an initial meeting. Unruh, Turner, Burke & Frees, P.C. is a full service law firm serving South Eastern Pennsylvania.
