Building Flexibility into an Irrevocable Trust

Sept. 26, 2011 - PRLog -- Today, an irrevocable trust is an excellent planning tool for those clients wanting to qualify for Medicaid benefits in the future.  Medicaid is the government program that pays for the bulk of long-term care provided in a nursing home setting.

The goal of the plan is to establish and fund the trust with assets that are countable (unprotected) for Medicaid purposes.  Once the trust is established, funded, and five years has passed after the date of the last transfer, all the assets titled in the trust are no longer owned by the transferor and are protected from the high costs of a long-term nursing home stay.  With only limited assets, generally $2,000 or less, the transferor is eligible for Medicaid benefits.  Once approved, the only thing that he or she has to do is pay all of his or her monthly income to the nursing home (Medicaid monthly co-pay), retaining only a small amount (personal needs allowance) to purchase personal items - toothbrush, toothpaste, haircuts, clothing, etc.

When establishing the irrevocable trust, what powers can the settlor (also referred to as the "grantor" or "trustor") grant to the trustee, giving the trust as much flexibility as possible without jeopardizing the goal of the trust?  The powers may include, but are not limited to:

   the trustee's right to invest any cash assets into tax-deferred annuities; the advantage of this power is that the annuities will grow tax-deferred and 1041 fiduciary income tax returns will not need to be filed - no taxable income;
   the independent trustee's right to make discretionary distributions of income to transferor's children and grandchildren;
   the trustee's right to lend funds to any person, including the grantor, for adequate consideration; and
   the trustee's right to terminate the trust and distribute the trust assets, assuming the transferor's children all agree; the assumption is that if the transferor is receiving Medicaid benefits there may be no real reason to continue the trust.

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Krause Financial Services specializes in helping families qualify for Medicaid benefits through the use of Medicaid Compliant Annuities, and Veterans Aid & Attendance benefits through the use of various life and annuity insurance products.