Frequently Asked Questions About the
Living Trust Plus® Medicaid Asset Protection Trust
and Living Trust Plus® Veterans Asset Protection Trust
I’m still healthy. Why should I care about avoiding nursing home expenses?
Because 70 percent of Americans who live to age 65 will need long-term care at some time in their lives, and because 50 percent of all couples and 70 percent of single persons become impoverished within one year after entering a nursing home. You can’t just hide your head in the sand and hope that you are never going to need nursing home care. The best estate plan in the world is useless if you wind up in a nursing home and spend all of your assets on long-term care.
What is the Living Trust Plus® Medicaid Asset Protection Trust, and how does it work?
The Living Trust Plus is an irrevocable asset protection trust that you create while you are living; you retain the right to live in any trust-owned real estate, it can be written to allow you to receive all income from the trust assets, but you cannot have direct access to principal. If either you or your spouse has direct access to principal, the assets in the trust would be deemed “countable” for Medicaid eligibility purposes and would be completely available to almost all other creditors. Prohibiting direct access to principal is the key to why the Living Trust Plus works — for general creditor protection and for Medicaid asset protection.
Does the Living Trust Plus® Medicaid Asset Protection Trust completely avoid probate, just like a regular revocable living trust?
Yes, if properly funded. So long as all assets are either titled in the Living Trust Plus or name the Living Trust Plus as the beneficiary on death, probate will be avoided.
You say I can’t have direct access to my principal. Does this mean I may have indirect access to the trust principal?
Possibly. There are two ways that you might have indirect access to the trust principal. The first way is that the trust is written so that the Trustee has the ability to make distributions of principal to the trust beneficiaries, who are typically your adult children. If the Trustee distributes principal to a trust beneficiary, that beneficiary can, but is not required to, give some of that principal to you or use it for your benefit. There must not be any prior agreement that a trust beneficiary will return some of that principal to you or use it for your benefit. The second way for the settlor to get at the trust principal is for the trust to be terminated, as explained below.
I thought this is an irrevocable trust? How can an irrevocable trust be terminated?
The Living Trust Plus® Medicaid Asset Protection Trust is an irrevocable trust, and many people, including many good estate planning attorneys, think that means the trust can never be terminated. But the fact is that the term “irrevocable” means only one thing – that the trust cannot be unilaterally revoked by the creator of the trust. Although the Living Trust Plus® Medicaid Asset Protection Trust is irrevocable and can’t be revoked unilaterally by the settlor, it can be modified by the settlor (who can change the beneficiaries and trustees without anyone’s permission), and it can be terminated or partially terminated upon the consent of the settlor, the trustee (often the settlor is the trustee), and all trust beneficiaries (usually the adult children of the settlor).
What kind of people use the Living Trust Plus® Medicaid Asset Protection Trust?
Typically clients who are in their mid-60s to mid-80s, already retired, and worried about the potentially catastrophic cost of long-term care, and they want to protect the nest egg that they’ve been saving for a rainy day. The rainiest possible day for most people is the day they start needing nursing home care, and if they want to truly protect their nest egg and have it actually benefit them when the time comes, they know they need to do something to shelter that money. The Living Trust Plus® Medicaid Asset Protection Trust, for many people, is the best way to do that.
What about Long-Term Care Insurance?
Most Living Trust Plus® Medicaid Asset Protection Trust clients don’t have long-term care insurance because they’re too old to afford it or to qualify for it, or they have a medical condition that prohibits them from getting it. For many such clients, the Living Trust Plus® Medicaid Asset Protection Trust is the best possible alternative to purchasing long-term care insurance to cover nursing home expenses. However, having both long-term care insurance (or hybrid long-term care coverage) AND the Living Trust Plus® Medicaid Asset Protection Trust provides the best coverage because long-term care insurance covers in-home care and assisted living, whereas Medicaid only pays for nursing home care or the nursing home level of care received at home.
What assets can go into the Living Trust Plus?
The main types of assets that should be funded into the Living Trust Plus® Medicaid Asset Protection Trust are real estate, any nonqualified (after-tax) financial investments, ordinary bank accounts, and life insurance. IRAs and Qualified Retirement Accounts such as 401(k)s and Thrift Savings Plans cannot be titled in a trust.
Are there gift tax implications when I transfer assets into my Living Trust Plus® Medicaid Asset Protection Trust or when the trust distributes assets to my children?
There is never tax due by the recipient of the gift. Very rarely a gift tax is due by the giver of the gift. Many people confuse the annual gift tax exclusion with the lifetime gift tax exemption, but these are entirely different. Let’s try to clear up the confusion:
The Annual Gift Tax Exclusion. The annual gift tax exclusion is the amount that can be given away by an individual (or by the trustee of the Living Trust Plus) in any given year to an unlimited number of people free from any federal gift tax consequences at all. For example, if you have three children, you (or the trustee of your Living Trust Plus) could give away the annual gift tax exclusion amount ($17,000 as of 2023) to each of your children each year, and these transfers to your children are completely disregarded for federal gift tax purposes and need not be reported.
The Lifetime Gift and Estate Tax Exemption. In addition to the annual gift tax exclusion amount, there is a lifetime gift tax exemption amount, which is the total amount that can be given away (over and above any annual exclusion gifts) by an individual (or by the trustee of the Living Trust Plus) over the individual’s entire lifetime. The lifetime gift tax exemption is the same as the federal estate tax exemption so that if you (or the trustee of the Living Trust Plus) give away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption when you die. For 2023, the lifetime federal gift tax exemption, which is the same as the federal estate tax exemption, is $12.92 million per individual (double this for a married couple).
Federal Gift Tax Return. If annual transfers are made in excess of the annual exclusion amount, then a Federal Gift Tax Return (IRS Form 709) needs to be filed by the giver of the gift by April 15th of the calendar year following the date of the gift. As stated above, there is a gift tax annual exclusion for gifts of $17,000 per person per year or less (as of 2023), and there is a lifetime exemption equivalent to $12.92 million per individual (double this for a married couple), which is the same as the federal estate tax exemption, so no gift tax will be due unless your total gifts (including gifts made by the trustee of the Living Trust Plus to beneficiaries of the trust) exceed the amount of this lifetime exemption. The annual exclusion amount and lifetime exclusion amount are currently set to increase for inflation in the future. If you have an accountant who does your taxes, you should have your accountant prepare Form 709. If you don’t have an accountant, our firm does — and we can prepare Form 709 for an additional charge.