The Value of a Grantor Trust for Medicaid Planning
While this combination of new rules from the IRS does not help to lower income or estate tax, it provided for the perfect vehicle for Medicaid planning. Nursing Home Medicaid imposes a penalty for any transfers made within the 5 years prior to the date of the application. If assets are transferred to a trust, the trust must be irrevocable and must provide that the grantor has no right to principal in order for Medicaid to consider the asset unavailable for eligibility purposes. Individuals interested in Medicaid planning were anxious to protect assets, but did not want to give up complete control of their assets, nor did they want to incur any negative tax treatment. The grantor trust rules solved those concerns. While Medicaid does prevent the trust from returning principal to the grantor, the grantor can still receive any income earned in the trust, can retain the right to reside in any real property in the trust and can change the trustee or beneficiaries at any time. Moreover, because the grantor retains the right to reside in any real property in the trust, the grantor is still entitled to any real property tax exemptions and still receive their $250,000 capital gains exemption if the property is sold.
As mentioned above, if property drafted, a grantor trust will provide that any income generated within the trust will be reported on the creator’s individual tax return, thus eliminating the possibility of a compressed tax rates. Additionally, since the assets are still includible in the grantor’s estate when they pass away, there will be a 100% step-up in cost basis equal to the fair market value as of the date of their death. This means that if a grantor purchased her home for $30,000.00 in 1980, the property will be re-assessed upon her death to the fair market value. Therefore, when the beneficiaries sell the property there will be no capital gains tax incurred.
Not all trusts are created equal. If you are considering a Medicaid trust, consult with an Elder Law attorney in your area to learn more.