Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

ANOTHER TWIST ON ESTATE AND MEDICAID PLANNING
(10/13/02)

Recently I was contacted by a father who wanted to divest himself of virtually all his assets so he could qualify for Medicaid. He wanted to be sure, though, that his children would take care of him with this money if it became necessary. He also wanted all his children to agree before any of this money could be used for anything other than his care. He didn't want his children running off with the money once he gave up control.

Are you a Gambler ?

I told him he had just discovered the big gamble in Medicaid divestiture. To qualify for Medicaid without a disqualification period, you have to give away essentially all your assets at least three years in advance of applying for coverage (five years if using a trust). No one wants to divest themselves of their property that far ahead since they are usually still in good health at that time. Even worse, giving everything away means just that --giving it up. You must make an unconditional gift. Then the kids can turn around, look you in the eye, and thumb their noses at you because "hey, it's ours now."

However, if there are any strings to the gift, it remains countable and you'll either be disqualified for Medicaid or face a penalty period.

Alternatives

There are some alternatives if you find yourself in this situation. One is to form an irrevocable trust at least five years before you apply for Medicaid.

Another alternative is to purchase an annuity that qualifies as a non-countable asset. If you are interested in pursuing this option, be sure to check with a qualified elder law attorney.

A final alternative that works well if everyone agrees is for the parent to make a gift to the children and the children to then establish a revocable trust for the benefit of the parent.

Before Dad relinquishes control of his money, he wants a binding guarantee that his children will put this money into the Trust. He isn't going to get one. He can't. He has to rely on their good graces. About the best we can do is prepare the Trust in advance and then let the children transfer the funds to it within a matter of days after they receive the money from the parent.

Let's say Dad has $100,000 in total assets. He gives $25,000 to each of his four children and reports the gifts on a Form 709, U.S. Gift Tax Return. Using the date of the last transfer, he counts forward thirty-six months to determine his period of ineligibility for Medicaid coverage.

The children establish a revocable trust with all four as grantors or settlors and voluntarily fund it with $25,000 each. Now Dad can sit back and breath a little more easily. Also, since he didn't establish the Trust, he avoids the longer 60-month look back period and only has to worry about waiting 36 months.

In this situation, I usually recommend you use two co-trustees and prohibit either from acting alone. This means distributions can only be made to Dad or the children with the unanimous agreement of the trustees. More than two trustees can make the Trust too cumbersome to administer.

The Trust should contain supplemental or special needs language which only allows funds to be used for Dad's benefit if they don't supplant other available government benefits or disqualify him for Medicaid. You can also state that the primary purpose of the trust is to provide for Dad's needs and only secondarily for the benefit of the grantors. This is somewhat restrictive, but may be appropriate in some situations.

The Trust remains in effect until Dad dies. Then the remaining trust corpus is distributed among the children, either outright or in trust and usually per stirpes.

The children may want to apply for a tax identification number for the Trust so the income can be taxed equally to all the children through K-1s. If they do, the income may be taxed at a higher rate and they may want the trust to make distributions equal to the amount of their tax liability so they aren't punished for taking care of dear old dad.

How Does This Work?

Let's assume Dad is able to avoid institutionalization until the 3-year disqualification period is up. He finds himself in a retirement facility and applies for and is approved for Medicaid. Now he finds he needs some additional money. Depending on its terms, the Trust may make distributions to the children who then gift the money to Dad (staying within the$11,000 annual exclusion to avoid filing gift tax returns) or the Trust may purchase the services or pay for the goods directly. The latter simplifies record keeping and ensures the funds are used for their intended purpose.

If Dad is concerned about how the funds are being managed, the children can give him duplicate copies of the bank, mutual fund or CD statements so he knows the funds are safe.

Most clients are comfortable with the revocable trust alternative even though there aren't any strings attached and they lose control of their money. They like the sense of protection that comes from the co-trustee and duplicate statement options.

Conclusion

If you feel you may need institutional care in the future and want to qualify for government assistance, consult with an estate pOctober 9, 2002lanning professional who can explain the procedures and help you create a plan that will meet your needs.

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