Posts tagged: Estate Planning Drafting Software

Many people who are seeking to qualify for Medicaid are concerned about protecting their assets from long-term care costs.  For most people, their primary asset is their home.  So what are the options to protect it when considering Medicaid planning? 

First and foremost, it is essential to be clear that Medicaid law provides that the home is an exempt asset from being included in determining one's eligibility for Medicaid.  A core distinction comes into play, however, when considering whether the Medicaid applicant is married or single.  If married, the Medicaid law provides that any transfer between spouses is permissible and does not trigger any ineligibility.  Therefore, if a husband and wife own a home, and one of them goes into the nursing home, the nursing home spouse can convey their interest to the community spouse and no penalty will result, and the house will remain exempt under the community spouse's exemption.  The question as to whether Medicaid can access the equity in that home after the death of the community spouse is a question of who dies first – the institutionalized spouse or community spouse.  

The bigger challenge, however, is in protecting the home for single applicants, or after one of the spouses has entered a nursing home or dies, thus leaving the remaining spouse single.  Accordingly, there are additional challenges for single individuals who own a home.  While the home is exempt in determining eligibility for Medicaid benefits, it is not exempt from estate recovery for single Medicaid recipients.  So, for single people or those who are married, with one spouse at a nursing home, the mechanism to protect the house requires an outright transfer of it to ensure its protection.  Retention of the house by a single individual subjects it to estate recovery after death, thus delaying the loss, but not eliminating it.  The question as to whether a house is subject to estate recovery is dependent on each individual state, estate recovery rule and Medicaid.  

The next challenge is, if a single individual or the community-based spouse transfers the home to a third party or irrevocable trust, it will trigger an "uncompensated transfer" and lead to a period of ineligibility.  The period of ineligibility depends upon the value of the conveyed house divided by the regional divisor (the average cost of one month of nursing home care in the region).

For example, a $200,000 house conveyed away in a jurisdiction where the regional divisor is $10,000 would create a 20-month ineligibility period.  In order to mitigate this penalty period, one may consider transferring the home and reserving a life estate.  By reserving a life estate, the underlying transfer is reduced by the value of the life estate.  For example, transferring the same $200,000 house and reserving a life estate to an individual who is age 72 provides for a .2369 interest being retained.  In this case, the remainder of .7134, or 71 percent of the $200,000, is deemed to be the uncompensated transfer (S. 142,680).  By reserving the life estate, this particular client will have reduced the penalty period by 5.73 months (penalty of 20 – new penalty of 14.27).  Obviously, reserving a life estate provides for a discount in the uncompensated transfer, which in most states disappears at death because there will be no value to the life estate as it extinguishes at death.  Some states have begun pursuing life estates after death.  For example, in Ohio, the discount really has no advantage because the state could pursue the remaining beneficiary for 5.72 months differential.

The question of how to protect the home is prominent in most people's goals. Another way to protect the home is to sell it.   The question is how best to do it to achieve the best result in the shortest period of time.  Utilizing the LWP Medicaid qualification software will allow you to determine the best approach and the cost benefit analysis on each choice you make.  If you would like a free demo of our estate planning drafting software, click here now to schedule a call.  We'll show you first hand how it can help you grown your estate or elder law practice.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

A question comes up for many practicing lawyers and allied professionals as to what trust to use when clients want to protect their assets and ensure eligibility for Medicaid and other needs-based benefits, should the need for long-term care arise. The Irrevocable Pure Grantor Trust (iPug®) has long been a trust of choice in providing clients with the most flexibility, the greatest protection and the greatest amount of control.  Understanding the distinctions between the various iPug Trusts, and how to use them to accomplish your client's goal, is essential.  

There are three iPug protection trusts utilized for clients, and each of them are Medicaid compliant, ensuring the assets within them are not considered available resources in determining their eligibility for Medicaid benefits. 

The three iPug Trusts are the MIT, the FIT and the KIT.  Let's cover each of them separately. 

The MIT, My Income Trust, is an income-only trust that allows the grantor to be the trustee to manage and distribute the assets as the grantor desires, other than to themselves or their spouse. Under Medicaid law, any trust created by an applicant or a spouse shall be deemed an available resource to the extent the applicant or spouse is able to benefit from it.  That's why it is essential in all three trusts that the grantor does not have access to the principal directly or indirectly by any means. 

For example, the court in Doherty held that a trust that contained the provision that allowed the trustee to terminate the trust if they deemed it appropriate and return the trust to the "beneficiary" was an available resource because, even though the trustee did not terminate the trust, the authority for them to do so would have resulted in the assets being re-conveyed back to the grantor.  This incidental approach was enough to have it be considered an “available resource.”  That's why it's essential that attorneys be certain that within the four corners of the trust document, there is no authority in any person or any condition which could occur so as to permit the grantors to access principal. 

The Doherty discussion has no impact on iPug Trust use because iPug protection trusts have long stated that if the trust is terminated for any reason, the proceeds go to the "remainder" beneficiaries.  This is an example of how to ensure that there is no way for the trust assets ever to get back to the grantors. iPug Trusts also permit the grantor the power to change the beneficiaries of the trust and the time, manner and method of distribution of trust assets at any time but without the right to change it back to the grantor or their spouse. This gives the client the maximum control available under the law. While the grantor as trustee and the retained powers and protection for beneficiaries are unusual to all iPug Trusts, let's examine the distinctions between these iPug Trusts.  The MIT permits the grantor to retain a right for their life to the income from the trust.  This ensures that the grantor can still control all of the assets and retain all of the beneficial interests from the assets, such as the interest on the bank income and the dividends from the brokers' accounts and right to live in or use the trust real estate, all without subjecting the assets to risk, and ensuring the assets are not included as an available resource in determining Medicaid benefits.  The second iPug Trust is the partial MIT, wherein the grantor retains a right to only part of the income, not all of it.  In that case, only the income right retained will be at risk to creditors, predators, and long-term care costs.  The MIT is commonly referred to as the income only version of the iPug.

The second trust in the iPug trilogy is the control-only version, which is known as the Family Irrevocable Trust (FIT).  In the FIT, the grantor retains all the rights to control and manage the assets, and has full 100 percent authority to distribute the assets to anyone they determine other than themselves or their spouse during their lifetime, but the grantor retains no right to the income or principal.  The primary use of a FIT is when the client does not need the income from their assets to maintain their lifestyle because they have sufficient other income to meet their needs.  The predominant benefit to the FIT Trust is allowing the grantor to remain in full control of their assets and to distribute them to the beneficiaries they choose, when they choose to distribute them (during life or after death). 

In addition, the assets accumulated and held in the FIT can be held and delivered to the beneficiaries at a "step-up" in tax basis at death, which ensures the beneficiaries inherit it at the tax value as of the date of death.  This will eliminate any capital gains tax to the beneficiary if they were to sell it.  [All iPug Trusts ensure the assets transferred to the beneficiaries after the death of the grantor can continue in an asset protection trust for the beneficiaries for their lives, wherein the beneficiaries can have full control of the trust and full rights to the income and principal of the trust. But creditors, predators, and lawsuits will not have access to it, nor will the principal of the trust be considered an available resource for the beneficiaries' Medicaid intentions and it will not be considered a resource for purposes of the application for financial aid for children who may be in college.]  The FIT is a great trust for clients who are successful and no longer need the benefits of their money but want to continue to manage and grow it during their lifetimes for their beneficiaries. 

Finally, the third trust in the iPug trilogy is the KIT, this is the Kids Irrevocable trust.  This trust is typically utilized to undo improper transfers done by the grantor during their lifetime.  Many times clients come to attorneys having already transferred the farm to the kids.  Transferring this farm or other assets such as bank accounts or brokers' accounts not only puts the assets outside the reach of the grantor's control, but more horrifically, subjects them to the risk of the transferees' creditors and predators.  For example, if the child of the grantor who received the asset got divorced, died, got sued, or went bankrupt, the very assets transferred to the child by the parent will be subject to those liabilities, thereby putting at risk the parent who initially transferred them.  The way to protect assets already transferred to third parties is to use the KIT.  The KIT is an irrevocable trust created by the children who receive the assets, who then agree that, during the lifetime of their parent(s), they give up all right to control and access to those assets, so as to ensure they are protected from their creditors and predators at least during the lifetime of the parents.  A properly drafted KIT will also ensure that the assets are protected after the death of the parents and are given back to the kids in a separate share MIT or FIT, depending upon the individual goal of each child.  LWP is the only organization in the industry that provides a KIT trust that permits this type of drafting.  The Kids Irrevocable Trust is also a usable tool when doing planning to ensure that a client is eligible for veterans aid and attendance and housebound pension benefits.  

So utilizing irrevocable pure grantor trusts is essential in today's estate planning environment.  The use of MITs, FITs, or KITs further distinguishes your skills as an attorney to meet the individual needs of clients.  The LWP iPug Trust Drafting system carefully identifies each of these trusts and triggers warnings and instructions when choices are made that can be better served in one of the other trusts.  Don't go it alone.  Trust the technology and support LWP gives you to provide the best options for your client.  To request a complementary live demo of our Drafting Software, click here now.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center