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  • Drafting Income-Only Trusts for Medicaid Eligibility and Tax Planning Navigating Look-Back, Grantor Trust, Basis and Gift Tax Rules

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    THURSDAY, JULY 31, 2014

    Presenting a live 90-minute webinar with interactive Q&A

    Joley L. Eason, ThompsonMcMullan, Richmond, Va.

    Judith D. Grimaldi, Partner, Grimaldi & Yeung, New York

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  • Drafting Income-Only Trusts for Medicaid Eligibility and Tax


    Joley L. Eason ThompsonMcMullan PC


  • Irrevocable Income-Only Trusts (IIOT)

    Self-Settled- created by Medicaid applicant or applicants spouse Trust Assets

    Income-Producing (CDs, Stocks, Rental Property, Mineral Interests) Non-Income Producing (Primary Residence)


  • Objectives of Income-Only Trusts

    Control Flexibility Protection Tax Savings


  • Advantages

    Preserve assets/exempt for Medicaid after lookback period Protect assets against potentially catastrophic costs of long-term 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


  • Risks

    Estate recovery Right to elect against spouses estate Depends on how state defines estate (probate/non-probate)

    Irrevocable No Access to Principal


  • Common Types of Trust Assets

    Income-Producing (CDs, Stocks, Rental Property, Mineral Interests) Non-Income Producing (Primary Residence)


  • 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 dont 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


  • 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)


  • Alternatives

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


  • The Five-Year Lookback Period

    The Deficit Reduction Act of 2005- signed into law February 8, 2006.

    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


  • 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


  • 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


  • The Five-Year Lookback Period

    The major provisions which affect long-term care Medicaid:

    Medicaids 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


  • 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 long-term 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.


  • 19

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

  • 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


  • Trusts vs. Direct Transfers

    Trust advantages Death Disability Debts Divorce Tax benefits

    Real estate discounts Grantor income tax

    status Capital gains


    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


  • Drafting Trusts - Types

    Medicaid Irrevocable Income only Grantor Trust Third party must be appointed trustee not

    Grantor Income may be payable to grantor or

    Grantors spouse or issue No principal distributions to Grantor Can remain includible in Grantors estate

    through retained interests, LPOA, etc. to secure capital gains protections stepped up in basis


  • Grantor Trust Rules for Income Tax Benefits

    Grantor trust status allows income to be taxed at the Grantors 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


  • 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 cautio