Asset Protection and Medicaid

by | May 25, 2011 | Asset Protection, Financial Therapy

We’re pleased to feature a guest post from Tom Simmons, a partner with the Rapid City law firm of Gunderson, Palmer, Nelson & Ashmore, LLP.

A Medicaid Irrevocable Income Only Trust (MIIOT; pronounced “my-ott”) is an irrevocable trust with both advantages for long term care planning as well as asset protection. Basically, a MIIOT provides for the distribution of only the income which is  generated from the assets the grantor contributes to the trust. The trustee distributes the income for lifetime of the grantor.  (The grantor is the person establishing and funding the trust.)

Income to the Grantor, Principal to the Children

Typically, the trustee is also given the ability to make discretionary distributions from the principal of the trust to the grantor’s children.  At the grantor’s death all of the assets remaining in the trust are distributed to the grantor’s children.  Thus, during the grantor’s lifetime, the Trustee is required to make distributions of all income to the grantor, and is given the discretion to make distributions of principal to the grantor’s children, but the grantor gives up the right to receive distributions of principal or otherwise control assets contributed to the trust.

Medicaid Five Year “Look Back”

The Medicaid rules provide that transfers to an irrevocable trust can result in a “transfer penalty” of Medicaid ineligibility for a certain length of time calculated on the value of the assets transferred to the trust.  The greater amount of wealth transferred to an irrevocable trust, the lengthier period of Medicaid ineligibility.

There is a five year “look back” period whenever an application for Medicaid long term care benefits is submitted.  If a transfer to an irrevocable trust falls within this “look back” period, a transfer penalty will almost always result.  The consequence of funding an irrevocable trust within the look-back period is a transfer penalty; a specified period of time during which the individual who made the gift will be deemed ineligible for Medicaid long term care benefits, despite otherwise qualifying for the program.

After Five Years, Assets Are Protected From Medicaid

Five years after the funding of the trust, however, the transfer would fall outside the look back period and no transfer penalties could be asserted.  Moreover, because the grantor of a MIIOT retains no right to distributions of principal, the principal of the trust estate is a non-countable resource for purposes of Medicaid eligibility.

If, after five years, the grantor requires long term care and is otherwise eligible for Medicaid on account of depleted resources and assets, the trust income would essentially be assigned towards the ongoing long term care monthly charge and the grantor would begin to receive Medicaid benefits, with no further liability for long term care costs.

Turning Your MIIOT Into a South Dakota Asset Protection Trust

A MIIOT can be structured as an “asset protection trust” (“APT”) if the grantor does not serve as trustee and at least one trustee under the trust is a South Dakota person (e.g., either an individual South Dakota resident or a bank trust department with offices in South Dakota).  If the MIIOT is structured as an APT by utilizing a South Dakota trustee, the trust assets will be immune from most creditor claims or lawsuits arising after the trust is funded that could be brought against the grantor.  The asset protection features of the trust would protect the trust assets from creditors of the grantor or the remainder beneficiaries (the grantor’s children, typically).

MIIOT’s Are Tax Neutral

A MIIOT is generally structured as a “grantor trust” so that all taxes generated on income from trust assets is taxed to the grantor.  This should also preserve the availability of the exclusion from capital gains (up to $250,000) on gain from a personal residence.  All tax matters should be confirmed with a competent tax advisor in advance of executing a MIIOT.

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