Benefits of Irrevocable Trusts in Medi-Cal Planning
People often wonder about the benefits of irrevocable trusts in Medi-Cal Planning. Outright gifts are easy to do with minimal costs. So, why complicate things with a trust? Why not just keep planning simple and inexpensive? The short answer is that transaction costs are only part of what needs to be considered. Many important benefits of trusts are forfeited by outright gifts.
Asset Protection from Creditors of Beneficiaries. A trust can protect assets from creditors and predators of the beneficiaries. This is accomplished by a “spendthrift provision”, which makes trust assets not subject to attachment, foreclosure, garnishment, or other undesirable actions by creditors of the beneficiaries.
Preservation of Capital Gain Exclusion upon Sale of Principal Residence. The Internal Revenue Code excludes up to $250,000 (or $500,000 for two owners) of capital gain from capital gains tax when the taxpayer’s principal residence is sold, if the taxpayer owned and lived in it at least two of the prior five years (or at least one of the prior five years if the homeowner moved to a state-licensed assisted living or nursing facility for health reasons). A properly drafted Medi-Cal Asset Protection Trust can preserve this benefit.
Preservation of Step-Up of Basis. When a decedent’s taxable estate contains appreciated assets, the successor receives them with the date of death value as his or her basis (the amount deducted upon a later sale). Assets gifted outright pass to recipients with “carryover basis” – the donor’s adjusted cost basis – rather than the donor’s date of death value. An irrevocable trust can preserve basis step-up for beneficiaries.
Whether Trust Income is Taxable to Settlors or Beneficiaries. Whether trust income is reported on the income tax return of the settlors (the people who created the trust) or the beneficiaries is a trust design choice. This allows income tax liability to go to the taxpayers who generally have the lowest tax rate, high tax deductions, and the like.
Ability to Decide Who Will Receive Trust Income. Unlike an outright gift, an irrevocable trust design can allow the settlor to receive income from trust assets.
Ability to Make Trust Assets Non-countable for Beneficiaries’ Medi-Cal or SSI. Sadly, an outright gift from a donor, such as a parent, to a disabled recipient can disqualify him or her from governmental benefits. Better planning is for gifts or bequests to be made to an irrevocable special needs trust for any disabled beneficiary, so the assets will be managed to enhance the life of the disabled beneficiary while not jeopardizing Medi-Cal or SSI benefits.
Ability to Specify Terms and Incentives for Beneficiaries. Parents or grandparents may desire to include positive aspirations or incentives in plans for children or grandchildren. Unlike outright gifts, irrevocable trusts can restrict gifts for such purposes as the recipients’ education, to finance career changes, or to buy a home. Or an intended recipient may become eligible for the gift only if he or she participates in a drug or alcohol rehabilitation program or stops some undesirable behavior.
Ability to Decide Which Beneficiaries Will Receive Assets Upon Settlor’s Death. The settlor may retain a “limited power of appointment” to designate who among the beneficiaries will receive trust assets upon the settlor’s death, and in what way they will receive those assets. An irrevocable trust can also direct that assets will pass in continuing trusts for successive generations, thereby preserving creditor protection and other benefits.
Conclusion. Through knowledgeable drafting, an irrevocable trust can greatly enhance the benefits of Medi-Cal planning beyond what can be accomplished through outright gifting.
Guest Atuhor Justin M. Gilber, Attorney at Law submitted this article for us. To find out more about Justin and the Estate Planning & Probate services he offers, Visit his Website.
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