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

Drafting Income-Only Trusts for

Medicaid Eligibility and Tax Planning Navigating Look-Back, Grantor Trust, Basis and Gift Tax Rules

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, OCTOBER 28, 2015

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

Kyla G. Kelim, Esq., Aging in Alabama, Fairhope, Ala.

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Income Only Trusts in

Medicaid Planning

Kyla G. Kelim, Esq.

AGING IN ALABAMA

Fairhope, AL

Irrevocable Income-Only Trusts

(IIOT) • Self Settled: This type of trust is settled by the Medicaid

applicant or the applicant’s spouse

• Trust Assets

- Income-producing

(Example: stocks, rental property, CDs)

- Non income producing

Residence

6

Objectives of Income-Only Trusts

• Control

• Flexibility

• Protection

• Tax Savings

7

Advantages of the IIOT

• Preserve assets/exempt for Medicaid purposes after

lookback period

• Protect assets against catastrophic long term care costs

• Pass on the estate to heirs

• Minimize tax liability

• Retain control over assets

• Avoid risk of loss

• Right to income – source of continued income

• Right to use, live in, sell real estate/purchase new

property

8

Risks associated with IIOT

• Estate Recovery

• Right to elect against spouse’s estate (depends on

state’s definitions: probate vs. nonprobate)

• Irrevocable

• No access to principal

9

Common Types of IIOT Assets

• Income producing assets

- stocks, rental property, cds

• Non-income producing assets

- residence

10

When to use IIOT?

• Depends on client and individual situation

• Generally advantageous when:

--Long term care planning for married couples with

different degrees of health and income

--Long term care planning for married couples in

good health

--Long term care planning for married couples who

will not need long term care for 5 years

• Trusts established for the non-institutionalized spouse of

Medicaid applicant/recipient

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When NOT to use IIOT

• Crisis planning when client will need long term care now

or in the near future

• Long term care planning for married couple with limited

resources

• Long term care planning for married couples with high

income who live in or plan to move to state with income

cap (ex: Colorado, Georgia)

12

Alternatives to IIOT

• Direct gifts

--increased tax liability

--exposes assets to risks from loss

--lack of control

• Other type of trust (no income reserved, special needs)

• Spousal refusal

• Spend down

13

Five Year Lookback Period

• Deficit Reduction Act of 2005 imposed a 5 year lookback

period (effective for most states 2/8/2006)

• Restrictions on transfers of assets

• Established penalty period for transfers for less than fair

market value

• Penalty Period is UNLIMITED

• Changed beginning point of penalty period

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Penalty Period

• Will be imposed for transfers for less than fair market

value after 2/8/2006

• Will not start running until applicant otherwise qualifies

for Medicaid benefits

--in a covered long term care facility

--spent down financially

--income qualified

• UNLIMITED

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How the penalty is calculated

• Penalty may be imposed for even minimal transfers

• The amount of the penalty is calculated by adding up the

transferred amounts and dividing by the average cost of

nursing home care in the area or state as determined by

the jurisdiction

• Can vary wildly by state

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Cost of long term care relating to

Penalty • Can vary by state: may affect placement:

-- Mom transfers her home worth $100,000 to

daughter in July 2011. She falls, hits her head, and enters

a nursing home for long term care in July 2015. She

spends her savings and is under $2000 and eligible in

October, 2015. In Alabama, divisor is $5800, so penalty

period in March 2017 and in Florida, divisor is $8346 so

penalty period is 12 months, she would be eligible in

October, 2016

• No long term care costs as little as $5800.00 in Alabama

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Cost of long term care relating to

Penalty • Can also vary within a state

• For example in New York, the costs vary by region:

--Central: $8,768

--Long Island (Nassau and Suffolk counties): $12,390

--New York City (5 boroughs): $11,843

--Northeastern: $9,414

--Northern Metropolitan: $11,455

--Rochester: $10,660

--Western: $9,442

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Cost of long term care relating to

Penalty • Is there another option in this example other than moving

to New York?

-- Mom transfers her home worth $100,000 to

daughter in July 2011. She falls, hits her head, and enters

a nursing home for long term care in July 2015. She

spends her savings and is under $2000 and eligible in

October, 2015. In Alabama, divisor is $5800, so penalty

period in March 2017 and in Florida, divisor is $8346 so

penalty period is 12 months, she would be eligible in

October, 2016

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Cost of long term care relating to

Penalty • If you said apply in August, 2016, you win!!

• Remember the 5 year lookback, if you wait to apply until

August 2016, then the 5 years has run…

• NO PENALTY

• If you apply in July of 2016, call your insurance carrier

• THE PROBLEM: Most nursing homes have your client

sign a Medicaid application on admission and routinely

file them

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Special types of cases

• Annuities

• IRAs or other types of retirement accounts

• Promissory notes

• Depends to a certain amount on state specifications

• Beware, in some cases, Medicaid will count unavailable

assets as available, spurring litigation

21

Impact of ACA

• Affordable Care Act

• For expansion states, individuals or families of higher

income may now qualify for Medicaid

• ACA uses modified adjusted gross income (MAGI) to

determine eligibility, ex: family of 4 making less $95,400

annually qualifies for subsidy: does not work for long

term Medicaid

• Medicaid resource limits and transfer of asset rules still

apply to long term care

• ACA eliminated preexisting conditions, families no longer

need to impoverish themselves to get care for a sick

child 22

Impact of ACA

• Disabled can now get private plan

• Individuals enrolled in both Medicare and Medicaid (dual

eligibles) are not eligible for a private plan

• No resource limits for ACA plan under the MAGI

determination

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Kyla G. Kelim, Esq.

AGING IN ALABAMA P.O. Box 109

Fairhope, AL 36532

(855) ELD-RLAW

[email protected]

www.elderconsults.com

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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 estate recovery and probate

– Irrevocable – Used for asset protection

• Special Needs

• Discretionary

• Sole benefit

This CLE will focus on the income only asset

protection trust. (Income issues)

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Trusts vs. Direct Transfers

• Trust advantages

– Death

– Disability

– Debts

– Divorce

– Dishonesty

– Tax benefits

• Real estate tax

discounts

• Grantor income tax

status

• Capital gains

advantages

• 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

27

Drafting Trusts - Types

• Medicaid Irrevocable Income Only Grantor Trust

– Third party must be appointed Trustee not

Grantor

– Income may be payable to grantor or

Grantor’s spouse or issue

– No principal distributions to Grantor

– Can remain includible in Grantor’s estate

through retained interests, for example:

LPOA, etc. Benefit- secures capital gains

protections and “stepped up” basis 28

Grantor Trust Rules for

Income Tax Benefits

• Grantor trust status

allows income to be

taxed at the Grantor’s

usually lower tax rate

• Income tax liability

remains with the

Grantor

• Trust tax rate -

income of $12,150.

(39.6%)

• How to achieve

Grantor status

• Retain interests

• Medicaid cautions

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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 caution

– Receive income or any trust assets including a life use

only. May not be discretionary or need approval of

adverse party. IRC 677 (a) (1)

• Use individual rather than grantor to exercise these

powers to avoid Medicaid implication

30

Trust Tax Issue- LPOA

– Limited Power of Appointment – drafting

requirements and Tax issues

– What is a LPOA ( Testamentary and Life time)

• IRC 674(b)(iii) provides a Limited POA will provide:

– Step up in basis on Grantor’s death under IRC 1014

– Grantor Trust Status to apply to Income and Principal

allowing use of individual’s income tax rates

– The 121 capital gains exclusion on sale of residence

– Incomplete gift for tax purpose if both life and

testamentary powers are included

– BUT Medicaid will not consider the trust assets since the

assets are no longer available to the Grantor

31

Tax Issues – Inclusion in

Taxable Estate?

– When are trust assets includible in Grantor’s

estate:

• Grantor retains a life interest/ life estate, or

• 5% or plus reversionary interest. IRC 673

• Or a power of appointment. IRC 674, or

• Any type of interest which would trigger

federal estate tax inclusion (IRC Sections

2036- Retained Life Estate ,2037, 2038-

Revocable Transfers)

32

When Trust Holds Residence

– Supervise the deed signing and deed filing

• Include life use, residency or tenancy ?

• Medicaid may consider certain retained interests to

be equity in the real property

• Trustee should preserve and maintain the property

as alternate to the life tenant

• Life tenant can retain any VA or Senior Citizen real

estate tax discounts or exemptions.

• If transferred property is subject to a mortgage?

– Consult state law relating to due on sale

clause. Is resident/borrower/beneficiary

protected? 33

Real Estate Trust Issues

• What happens when Grantor can no

longer live in the property?

• Designate that real estate must be sold

• Identify life estate costs and management

• Problematic areas:

– Multiple beneficiaries

– Covering costs

– Family members living in premises

34

Trust Drafting Cautions

Caution Power of Appointments

– Risk – an individual serving as Trustee and

Beneficiary with the power to administer an

irrevocable trust, will be found to have a

General not limited Power of Appointment

resulting in the trust assets included in the

Trustee’s estate. To avoid this… Limit lifetime

distributions to HEMS or have an only the

independent Trustee make distributions to the

Trustee. Interested Trustee cautions.

35

Income Tax Issues for Trusts

• Trust can be a separate tax payer

• Irrevocable Medicaid trusts need EIN’s. SS

number of Grantor should not be used.

• File separate fiduciary tax return (1041)

reporting all income whether distributed or

accumulated.

• Issue a K-1 to Grantor or all beneficiaries

listing the share of income, deductions, and

credits distributed

• Double Grantor Trust issues

36

Drafting Articles on Distribution of

Principal

• Grantor may have no access to principal

• Third Party trusts and SNTs can give

Trustees discretion to use trust assets for

the benefit of the Medicaid Applicant or

Recipient

• Sole Benefit and Spendthrift trusts are

another form of discretionary trust but use

caution in applying trust assets for

support and medical care.

37

How to Provide Access to Principal

If Needed

• Establish a class of beneficiary to whom

the trustee may distribute principal

– Back door access

– Avoid distribution to minors if trust may need

to be amended or decanted

– Provide for independent trustee to allow

distribution to family member or individual

who is serving as trustee

38

Special Trust Clauses

• Default SNT provisions

• IRA conduit language

• Addressing Digital Assets and Accounts

• Bequests of Tangible Personal Property

• Combining an Severing Trusts

• Tax appropriation/residuary estate

39

Drafting Distributions at Death

• No particular Medicaid requirement:

– Income Only Grantor trust may distribute the

same as a Last Will. ( Option- use a “pour

over” will)

– Can include credit shelter and tax provisions

Exceptions:

– SNT – first party must have pay back

– Sole benefit trust must be made payable to

the estate.

40

Trustee

Provisions/Recommendations

– If family member to serve as Trustee provide

for appointment of independent Trustee or

Co-Trustee.

– Provide for appointment of authorized trustee

for decanting

– Provide for successor trustee and resignation

options

– Consider whether the Trustee may act

individually or serve alone

– Trust protector? 41

Special Trust Clause

• Consider putting SNT as a default

provision for all beneficiaries who may be

disabled

• Consider trusts for drafting around minor

children and grandchildren.

• Consider inserting flexibility into draft to

make amendments or emergency

revocation possible if eligibility is needed

before the 5 year look back period. 42

GRIMALDI & YEUNG LLP

9201 Fourth Avenue, 6th Floor

Brooklyn, New York 11209

546 Fifth Avenue, 6th Floor

New York, New York 10036

(718) 238-6960

[email protected]

www.gylawny.com

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