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Do assets in a Medicaid trust still enjoy a step-up in tax basis at death?
Answer: The short answer is yes, so long as the grantor (creator of the trust) retains certain powers causing the trust assets to be included in the grantor’s taxable estate.
A Medicaid Asset Protection Trust (“MAPT”) is a type of irrevocable trust designed to protect assets for the purpose of qualifying for Medicaid. Long-term care, such as nursing homes, are typically not covered by normal health insurance which means that one must either pay the cost privately or qualify for Medicaid which requires meeting the applicable asset and income limits. In 2023 in New York the asset limit for an individual applicant is $30,182 and the monthly income allowance is $1,677/month for home care and $50/month for nursing home care. This means that any assets in excess of the asset limit would first have to be sold and expended on your care, and only after you were below the $30,182 asset allowance would Medicaid pay for your care. However, by transferring assets to a MAPT, after the five-year look-back period any such assets that were transferred are no longer considered as an available resource for purposes of Medicaid edibility and would be protected.
In addition to long-term care, another important estate planning issue to consider is the potential tax liability of highly appreciated assets and whether Section 1014 of the Internal Revenue Code can be used to achieve a step-up in basis to date of death value. In general, when someone sells an asset that has appreciated in value, such as one’s home, the taxable gain is the difference between the sale price and the seller’s purchase price (i.e. tax basis). For example, if someone purchased their home for $100,000 and later sold it for $500,000, they would be subject to capital gains tax on the $400,000 difference (setting aside the $250,000 capital gains exclusion available for the sale of one’s primary residence). However, assets which are part of your gross estate at death enjoy a step-up in basis to date of death value. So, if we take the example above, if the home was worth $500,000 at the time of the owner’s death, that would become the new tax basis for the property, saving whoever inherits the property significant capital gains taxes.
A common question people have, especially in light of IRS Revenue Ruling 2023-2, is whether assets held in an irrevocable Medicaid qualifying trust enjoy a step-up in basis to date of death value. Assets in a MAPT do enjoy a step-up in basis so long as the grantor retains certain powers over the trust such that the trust assets are includable in the grantor’s taxable estate. The Internal Revenue Code sets forth specific powers that cause assets to be included in one’s estate (thus receiving a step-up in basis), such as if the grantor retains: (i) a limited testamentary power of appointment (i.e. the right to change the remainder beneficiaries of the trust property after death), (ii) the right to trust income, or (iii) the right to reside in real property owned by the trust.
The beauty of a properly drafted MAPT is that while the grantor will not be considered the owner of trust assets after five years for Medicaid eligibility purposes, the grantor is still considered the owner for tax purposes, enabling a basis step-up at death.
Author: Nancy Burner, Esq.
