The most valuable property for most people is their home. It’s likely that you want your children to inherit its value when you pass away. However, you may also have concerns about planning for the future, especially if your health declines unexpectedly and you need expensive long-term care. Although Medicaid can pay for these services, Medicaid eligibility rules prohibit owning more than around $2,000 in assets to be eligible. This is why it’s important to have an irrevocable trust in place.
BENEFITS OF AN IRREVOCABLE TRUST
An irrevocable trust has several advantages that will allow you to plan for the future and to ensure that your family is taken care of after you pass away.
PREVENTS MEDICAID PENALTIES
By putting your house in the ownership of a trust, you can prevent Medicaid penalties while also ensuring that you’ll be reimbursed for health expenses. By taking your house out of your name you are still able to reserve your right to live in it. This is all possible with a carefully drafted irrevocable trust. Signing away valuable property is a big step, but it keeps your current living situation unchanged, and can have long-term benefits.
AVOIDS PROBATE PROCEEDINGS
One advantage of an irrevocable trust is that it allows you to avoid probate proceedings. Trusts are private agreements that usually require no court supervision.
AVOIDS CAPITAL GAINS TAXES
If you decide to sell your house and move into a smaller place in the future, this could pose a capital-gains tax problem. If the trust hasn’t been carefully drafted, the personal residence exemption may be lost. Capital gains tax would be forfeited if the house has appreciated in value since the date of purchase.
A similar problem can come up when it comes time for your children to inherit. If the trust is not properly drafted to cover this, your heirs will lose the basis-adjustment tax break, which could cost them dearly. The basis adjustment allows the inherited value of the home, for capital-gains purposes, to be calculated not from the date you originally purchased the home but from the date your heirs inherit the property.
PROTECTS YOUR ASSETS FOR YOUR HEIRS
You can minimize your heirs’ exposure to capital gains tax in the future, by designating a limited power of appointment within your trust. The authorized person will be able to disburse your assets to chosen beneficiaries, provided those beneficiaries are limited to family or charities.
The limited power of appointment allows your wishes to be met so that your assets pass down to beneficiaries while preserving eligibility for both the tax basis adjustment and Medicaid.
THE SOLUTION TO MEDICAID PLANNING & TAX ISSUES
An irrevocable trust is a wise estate planning strategy that solves Medicaid planning and tax issues by doing the following:
- Transferring your house’s title to the irrevocable trust while reserving your right to still live in it, which avoids Medicaid penalties or reimbursement problems after five years
- Creating grantor trust status to preserve the residence exemption, which allows you to avoid capital gains tax on the sale during your lifetime
- After you pass away, the adjusted-basis tax break is preserved by designating a person to administer and disburse the assets in the trust
STARTING THE IRREVOCABLE TRUST PROCESS
Creating an irrevocable trust is an essential component of estate planning that benefits you and ensures that heirs and loved ones are taken care of according to your wishes.
Trusts are carefully drafted to comply with current rules regarding ownership and taxes to prepare for Medicaid eligibility and protect your assets for your family.
Even if you have a will, the protection of your assets is not guaranteed unless it becomes part of an estate plan that includes an irrevocable trust. Also, a qualified estate planning attorney may find that your will or estate plan isn’t Medicaid-qualified, or that it lacks provisions for a grantor trust or the necessary powers of attorney. Fortunately, an irrevocable trust can be changed.
Trusts that do not take into account various contingencies can happen if they aren’t carefully drafted with an estate planning attorney. With this in mind, you should meet with us, as your Lawyer for Life, to discuss your specific planning needs, so we can help you with planning solutions to ensure your loved ones are protected and provided for no matter what.
Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice is comprised solely of working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe!
Please contact our office today at (281) 665-3807 to schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.