Contributor ⭐

Medicaid: Taxes on Irrevocable Trust

Forum|Forum|1 year ago
December 5, 2024
8 replies
7144 views

Who and how do I pay taxes on the interest of a irrevocable trust? The trust is to support the expenses to take care of my 92 year old mother in assisted living. I would control those funds.

My mother is 92 and lives alone at home. She is ready to move to a assisted living facility.

I received the following advice/info from a family law paralegal friend: She is currently qualified for Medicaid, but she will lose that eligibility when she sells the house. Its been recommended she take the profits from her home (300k) and create a IRREVOCABLE Trust with myself as the beneficiary/control of funds. The purpose of creating a trust is to satisfy the 5 year lookback for Florida Medicaid eligibility IF she needs Medicaid AFTER the trust has existed for 5 years.

Im trying learn more about the tax ramifications. Would this normally be a GRANTOR or NON-GRANTOR type ? If it has its own TAX, what is the tax rate? Id expect this trust to earn about 12,000 a year in interest. Not more than 15k. We expect to draw about 36k a year from the trust.

Just need some rough tax numbers, some advice or a link to a good article. Whats your personal experience???? Where should I invest 300k if my mom sells her house? A CD? Looking to understand some DO and DONTS and how this normally works. Its only 300k. Not talking millions.

This topic has been closed for replies.

GailL1

Community Champion ⭐⭐⭐

@JeffreyS508376

This should explain it -

Investopedia - updated 08/31/2024 - Irrevocable Trusts Explained: How They Work, Types, and Uses

Make sure you work with an Eldercare Attorney in setting it up and putting assets into it.

I am still confused as to why you want to do this rather than just sell the house and use the proceeds to pay for her choice of Assisted Living facilities for several years.

Especially if it is only the proceeds of the house that is going into the Irrevocable Trust. I assume that the house itself is not being put into the Trust since she seems to need the money from the sale of the home to help pay for her Assisted Living residency and care.

Once her income and asset level has been decreased, Medicaid would take over with her LTC - but it probably won’t be at the same Assisted Living facility - Florida may also have some sort of a Medicaid Spenddown program where they can go to the program once their assets have been reduced to a certain level/

Make sure you understand how Assisted Living works - there is a base fee that covers room and board and some incidentals - then there is a care level surcharge that is added and may increase based on how much actual help she needs for her activities of daily living.

This should help with your taxation question - at least at the federal level -

IRS.gov - Abusive trust tax evasion schemes - Questions and answers

What exactly is your purpose of an irrevocable trust? Just so she doesn’t have to spend any of the money from the proceeds of the home sale? It is her money - right?

IT‘S ALWAYS SOMETHING . . . . .. . . . Roseanne Roseannadanna

J

JeffreyS508376Author

Contributor ⭐

Thank you. My goal is for her to use her funds to best cover her expenses and any future unknowns. The trust would not be to save or protect funds for my use. But a trust can allow her to one day (5 years) be eligible for Medicaid even with a large amount of money in a trust.

You would think AARP would have an entire article about Irrevocable Trusts but they dont? Pros and Cons. I paid for full AARP membership and have found very little information specifically about Medicaid and Trusts. Everything is geared around Living Trusts, Will, Medicare and basically selling me something.

As to why a Irrevocable Trust? Im not expert, but Im being advised, and seek more advice. Its solely to allow her to be eligible for Medicaid LTC in 5 year. Florida will do a 5 year lookback. Yes, we can afford normal assisted living now, but NOT if she requires memory care or say has a stroke. If she has a stroke, like her younger brother, the cost of daily care would drain her 300K in a matter of months. She/we would be broke and need Medicaid Long Term Care. A trust has the ability to keep a nest egg AFTER 5 years. So basically in 5 years, even with 100k in a trust, she would be FINANCIALLY eligible for Florida Medicaid.

A trust allows her to still have money available (through a beneficiary) even if she is receiving Medicaid. Thats how I understand it. Yes, its somewhat of a gamble and may not have the financial benefit if say she has a stroke next year. Well then we disolve the trust to Zero anyway. All we lose if the cost of laywer ($1000) and the higher taxes we pay on the Trust interest earned since it has its own Tax ID but a much higher tax rate.

If I understand this wrong.. or this is a bad idea.. I'd love to hear advice. Thanks

https://www.elderneedslaw.com/articles/irrevocable-medicaid-asset-protection-trust

Federal trust income tax rates for 2024 are:

For trust income between $0 to $3,100: 10% of income over $0
For trust income between $3,100 to $11,150: 24% of the amount over $3,100
For trust income between $11,150 to $15,200: 35% of the income over $11,150
For trust income above $15,200: 37% of the amount over $15,200

T

Tonster521

Community Champion ⭐

@JeffreyS508376 After reading the link you provided (elder law.com), I have a better understanding of the Medicaid Irrevocable 5 Year Trust in Florida. It appears to be a strategy for folks who want to protect assets from Medicaid Spendown Requirements. If someone can pay their expenses for 5 years using other sources of income (i.e., SS Benefits, Pension, Savings/Investments, children (or beneficiaries) financial assistance, etc.) certain assets may be transferred to such Trust for the benefit of one's beneficiaries.(i.e., spouse, children, etc.) In your Mom's case, the challenge is to ensure the grantor/eventual Medicaid applicant (your Mom) has enough money to cover 5 years. It is noted to place a substantial amount (usually not all of the assets) into such Trust.I clicked on the phrase, "five year lookback period" which is highlighted in blue, and found examples and other pertinent information. If your Mom needs approximately $50 K for Assisted Living in the first year, subsequent years will cost more due to inflation as well as the costs for addition needs. She will come close to spending almost all of the $300 K from the house sale.If she has additional medical expenses (in the future), the $300 K may be depleted sooner than 5 years.Does your Mom have Medicare or Medicare Advantage? If Medicare, does she have a Medicare Supplement? Or is Medicaid her current Supplement? If Medicaid, I think she will no longer be eligible for Medicaid due to the house sale. Based on the answers, she may be self insuring herself which is not something to gamble on. I agree that the Trust may be a viable strategy as long as a person can cover 5 years of expenses without drawing down the Trust's assets. I would review the strategy with an elder law attorney.

GailL1

Community Champion ⭐⭐⭐

@JeffreyS508376

Another link that can help you understand Irrevocable Trust

SmartAssets.com - updated 06/25/2024 - Revocable vs. Irrevocable Trusts: What’s the Difference?

It will give you several pros and cons of an IRREVOCABLE Trust.

IT‘S ALWAYS SOMETHING . . . . .. . . . Roseanne Roseannadanna

J

JeffreyS508376Author

Contributor ⭐

"Holding assets in an irrevocable trust can also be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets"

this sentence from your link is exactly why its being recommended. But its a gamble. Its only useful if she DOES NOT need Medicaid for at least 5 years. In 5 years if she needs Medicaid LTC any money in the trust would NOT count against her for financial eligibility. I have an attorney willing to create the Irrevocable Trust for less then $1000. But the trust may have a much higher tax rate. A trust has its own Tax ID and no standard deduction AND a higher tax rate. VS my mom simply claiming the interest on her own taxes. So yeah.. Im not totally convinced a trust is ideal for our situation.

GailL1

Community Champion ⭐⭐⭐

I guess I don’t understand the use of the Irrevocable Trust in her situation.

Why not just use the funds from the sale of the home to help her pay for HER CHOICE of an Assisted Living facility rather than put her on Medicaid now where her choices of living facilities are limited to thosse that will take Medicaid funds?

When the Irrevocable Trust is established, and the assets are placed within it, there is no further touching of these assets until she dies.

Your mom isn’t gonna have to pay taxes on a huge amount of the funds from the sale of the house - Depending on the sale amount of the home, she could have some capital gaines taxes if the sale is over the amount that she is allowed to exempt - $ 250,000 but that’s after the proceeds are modified of home improvements over the years. Her basis is the price of the home + any improvements that were made over the years. If she just puts the money in an investment to grow, she will have access to it to pay for her AL care. Yes, she will have earnings on it that are taxable but she is also gonna have offsets like the cost of her AL care and anything else that is deductible over the standard + elderly standard deduction.

She can have a nice life in an AL facility of her choice within financial reason (as differing from one that accept Medicaid) and then when the funds from the sale of her home are almost used up she can then qualify for Medicaid LTC - with or without a spenddown depending on how much she has left at that time. She just cannot give away any of the assets or money from the sale of the assets within that 5-year Medicaid look back period because it will be counted against her Medicaid IF she wants to go on it anytime within that 5-year look back period.

If there were more assets - like a million or more, yea, an irrevocable trust would protect the assets inside the trust from Medicaid.

So what difference does it make if she signs up for Medicaid LTC now (with an irrevocable trust) vs signing up for it 3 or more years down the road when she has spent the proceeds of the house sale?

If those proceeds from the house proceeds or any other asset go into an irrevocable trust - nobody can touch the funds until some time in the future as defined in the trust and usually that is the dearth of beneficiary. Then the money is distributed as the Trust states.

Let’s say she gets

$ 1800 in SS benefits per month,
the Assisted Living cost $ 5000 a month -
She will have to make up that $ 3200 each month out of the proceeds from the house sale. Or $ 38,400 per year
Let’s say she nets $ 150,000 from the house sale -
Then, adding in earning on the $ 150,000, she will have it pretty much covered for (4) years.

Then she can go on Medicaid - and she has no assets to protect cause they are already spent on her care.

IT‘S ALWAYS SOMETHING . . . . .. . . . Roseanne Roseannadanna

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