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Irrevocable Medicaid Trusts
Planning in advance for Medicaid often involves the use of a trust. For a gift in trust to remain protected if you later need nursing home care, the trust must be irrevocable. Our office uses irrevocable income-only trusts in Medicaid planning. That means once you set it up, you cannot change its terms. You can be the trustee, meaning you decide how the assets are managed. For example, you decide whether real estate is sold or leased, or how money is invested. You can also be the recipient of the income produced by the trust. That is, you could receive the rents, interest, dividends, and other income that the assets invested produce. However, you may not be the beneficiary of the principal of the trust. If you need $10,000.00, you could not distribute that sum to yourself from the trust principal. The persons who are the beneficiaries of the principal of the trust are usually your family members or friends, and they could receive such a distribution.
When we assist our clients with irrevocable income only trusts, we advise them not to transfer assets into the trust if they anticipate needing those assets in the future. Once the assets are in the trust, there is no way for the client to get the funds back from the trust unless they make a distribution to the other beneficiaries, and the other beneficiaries decide to give the assets back to the client. There can be no obligation for the beneficiaries to give the funds back to the client.
An irrevocable income only trust is an excellent tool for asset protection. First, you, as trustee, may remain in control of the assets. Second, with the proper wording, the assets are protected from your children’s (or other beneficiaries’) creditors. Third, the trust is a “grantor trust” for income tax purposes, and is not a separate taxpayer. All income is reported to you on your income tax return. Fourth, you can retain a testamentary power of appointment to give you some flexibility regarding who is the ultimate beneficiary of the trust when you die. That is, while the trust terms may provide that when you die, all of your children are your beneficiaries in equal shares, you can modify this distribution in your last will & testament by stating that you want to omit a child that has, for example, become a drug addict.