Medicaid Asset Protection Trusts in the Buffalo, NY Area

Typically the terms of the trust provide that all the trust income (interest, dividends etc.) can be paid to the Grantor, who is the person that establishes the trust and whose money or property is used to fund it. As an alternative, the income can be paid to other third parties named as income beneficiaries or accumulated and reinvested as part of the trust principal. In order for the principal of the trust to be protected from the Grantor’s long-term care costs, no principal distributions can be payable to the Grantor. If principal could be paid to the Grantor, the entire trust would be considered an available resource by the Department of Social Services (which is the local agency that administers the Medicaid program). That being said, the trust can provide for principal distributions to be made to the Grantor’s children or other third parties that the Grantor wants to benefit during his or her lifetime.    

Five years from the date that the last asset is transferred to the trust, the entire principal of the trust is protected from skilled nursing home costs. However, if the Grantor elects to receive the income from the trust, this income could be considered available to pay for the Grantor’s long-term care costs.  

The month following the month in which all of the assets are placed into the trust, the Grantor could apply for one of the Community Medicaid Waiver programs (which could provide care to the Grantor at home) without any sanction because there is currently no look back period for Community Medicaid Waiver programs. 

Notwithstanding that a Medicaid asset protection trust is irrevocable, if properly drafted, it can be written so that it is still flexible. The Grantor can retain the right to change the lifetime beneficiaries of principal and the ultimate residuary beneficiaries of the trust through use of a limited power of appointment. As such, if the Grantor has a dispute with one of the beneficiaries and decides he wants to remove that beneficiary after the trust is established, he can do so. Further, this limited power of appointment also gives the Grantor the ability to add beneficiaries (other than the Grantor) to the trust after it is established. The Grantor can also retain the right to remove one or more of the Trustees for any reason. 

Income on the trust can be taxed to the Grantor if the trust is established as a Grantor trust. A Medicaid asset protection trust can use the social security number of the Grantor or it can have its own separate tax id number. If the Grantor’s social security number is used, no separate tax filing has to be prepared for the trust and the Grantor just claims all of the income on his or her personal returns like he or she did prior to the establishment of the trust. If a separate tax identification number is used, this can necessitate the Trustees having to file a separate income tax return for the trust but this is an informational return only. This fiduciary income tax return will never include any of the trust income and the trust will never pay any income tax. Instead, the Trustees will give the Grantor a statement that itemizes all of the income on the trust that the Grantor will then include on his personal income tax returns. This will allow the Grantor to pay the income tax on the trust investments as he did prior to the ownership change to the trust.  

The trust beneficiaries trust will receive a step-up in cost basis on most property in the trust (like real estate and stocks) at the time of the Grantor’s death. This means that the beneficiary will only be liable for capital gains tax on the difference between the value of the asset as of the Grantor’s date of death and the value on the date that the assets are sold.  

A trust can also avoid probate. As such, the Grantor’s Last Will and Testament will not have to be probated in the Surrogate’s Court when he dies in order to distribute the trust assets to his beneficiaries. Avoiding probate is typically a good thing as you can eliminate Court filing fees, legal fees and time delays that are associated with the probate process.    

A trust can also protect the assets transferred into it from the beneficiaries’ creditors’, which is not the case with an outright gift to a child. Further, the assets in the trust are protected from beneficiaries’ spouses in a divorce proceeding.  

Finally, even though a Medicaid asset protection trust is irrevocable, it can be amended and either partially or completely revoked pursuant to New York Estates Powers and Trust Law section 7-1.9. Pursuant to this statue, if all of the interested parties (which is defined as the Grantor and beneficiaries) to the trust agreement consent to amend or revoke the trust, it can be done. This is sometimes very important if the Grantor or his spouse need skilled nursing home care within 5 years of transferring the assets into the trust. If the trust is completely revoked in that scenario and the assets are returned to the Grantor, a gift and promissory note plan or additional planning may then be appropriate to preserve assets from nursing home care costs.