Trusts are created for various reasons. One reason is to protect assets in the event that the individual needs long-term care (nursing home or home care). This is also known as Medicaid planning.
There is no perfect plan that an attorney can give you. However, the Medicaid Protection Trust has many advantages to it. Take a look at the following example:
Sandra’s attorney created a life estate for her six years ago. Gloria’s attorney created a Medicaid Protection Trust, which is an irrevocable trust, at about the same time. Unfortunately, Sandra and Gloria are now in a nursing home. The children of Sandra and Gloria consulted with an elder law attorney, Cindy, in order to get Medicaid for their respective mothers.
When Sandra’s children consulted with Attorney Cindy, she told them that they had four choices now that their mother was in the nursing home:
- Leave the home vacant during the time that their mother is in the nursing home;
- Rent the home out to a tenant and become landlords: the net income will go to the nursing home;
- Move into the home themselves (they have their own homes); or
- Sell the home.
Attorney Cindy further explained that if the home were sold, their mother would be entitled to approximately 10% of the sale proceeds because of her interest in the life estate. This money, at least in part, would have to be used to pay for her care in the nursing home. Attorney Cindy further explained that there would be capital gains taxes on the portion owned by the children in the amount of $25,000.*
When Gloria’s children consulted Attorney Cindy, she had much better news for them. The home could be sold and because their mother had no interest in the home, none of the sale proceeds would be paid to her. Furthermore, the trust is a grantor trust (a trust that is taxed to their mother) and because their mother has an exemption amount of $250,000 against the capital gains taxes, there would be no capital gains taxes due on the sale.
There is no perfect plan that fits everyone. However, in most cases the Medicaid Protection Trust is the best solution for most clients.
*Please note that the amount of the sales proceeds that would go to the life tenant depends on her life expectancy. Also, the amount of capital gains tax varies depending on the life expectancy of the life tenant and the amount of the net sales proceeds. The above figures given are merely representative of what a typical client might experience.
