A trust can play a useful role in planning for long-term care, but the right structure depends on the problem you want to solve. Some trusts address assets held for the future. A Qualified Income Trust addresses monthly income eligibility. A supplemental needs trust serves a person with a disability under a different set of rules.
Spiro Verras helps clients compare these choices in the context of the care they want, the resources they need to keep available and the people they hope to provide for.
Three different planning purposes
- An irrevocable asset-planning trust may hold property under terms that limit its availability to the person applying for Medicaid.
- A Qualified Income or Miller trust receives the person’s income to address an income cap for certain long-term care programs.
- A supplemental needs trust supports a beneficiary with a disability while accounting for applicable benefits rules.
The name “Medicaid trust” is not enough to identify the result. The terms, source of funds, timing and administration determine how a particular trust is treated.
Planning ahead with an asset trust
An irrevocable trust may be designed so that principal is unavailable to the person who funded it, while permitted income or use of a residence is treated separately. Medicaid’s rules examine whether any circumstances allow payments to or for that person’s benefit. Careful drafting and administration are essential.
Funding such a trust can be a transfer for less than fair market value. The generally applicable five-year Medicaid transfer review can therefore affect the timing of eligibility. The period looks back from the relevant application and eligibility circumstances; it is not a promise that every trust qualifies automatically after five years.
This approach can suit someone planning well ahead who has sufficient resources outside the trust. The family should understand how ordinary expenses, unexpected needs and possible future care will be funded before deciding what to transfer.
Keep access and flexibility clear
We begin with a practical question: What resources do you need to remain available for your own life? A plan should support your comfort and choices as well as your long-term goals.
An irrevocable trust can retain particular forms of flexibility, such as a way to replace a trustee or adjust certain remainder provisions, if the governing rules permit. Those powers must be coordinated with eligibility and tax objectives. A right to recover principal can produce a very different benefits result from the arrangement you intended.
Choosing the trustee matters too. You want someone who understands the document, can manage the assets responsibly and will communicate clearly with the family.
What assets might fit?
Cash and investments may be suitable, depending on the family’s liquidity needs and time horizon. A residence requires separate attention to occupancy rights, property taxes, mortgages, insurance, homestead rules and what happens if it is sold.
Retirement accounts generally require a different approach from retitling an ordinary investment account. A proposed transfer can have income-tax consequences, and the treatment of distributions must be considered. We review the particular asset before changing ownership.
For highly appreciated property, the comparison includes both Medicaid planning and capital gains. The basis of a lifetime gift generally carries over. Some trust designs retain estate inclusion or other qualifying features for a basis adjustment at death; other designs do not. Income-tax grantor status alone does not establish a basis adjustment. Your CPA should be part of that discussion.
What tax reporting should you expect?
An irrevocable trust may still be a grantor trust for income-tax purposes, so income is reportable by its tax owner. Eligible grantor trusts can use optional reporting methods; others require an informational filing. A nongrantor trust has different income-tax and beneficiary-reporting rules.
Whether funding is a completed gift, whether a gift-tax return is required, and whether assets remain in the taxable estate are separate design questions. We coordinate the document and proposed funding with the tax adviser so those consequences are understood before the transfer.
How does a Miller trust differ?
A Qualified Income Trust deals with monthly income rather than a portfolio of assets. It is funded with the recipient’s income and accumulated income, with sufficient deposits made in the month the income is received. Other eligibility requirements remain in place.
The income is still considered in calculating the recipient’s required contribution toward care. The trust must include the state’s required interest in the remaining funds at death. Its timing and administration are therefore quite different from an advance asset-planning trust.
Where does a supplemental needs trust fit?
A supplemental needs trust may help a person with a disability receive support alongside public benefits. A third-party trust holds funds supplied by others. A first-party trust holds the beneficiary’s own funds under specific statutory requirements. A nonprofit pooled trust provides another possible structure.
Each has its own eligibility, funding and remainder rules. A QIT and a supplemental needs trust should never be treated as interchangeable simply because both can be relevant to Medicaid.
Consider the entire plan
Trusts are one part of long-term care and Medicaid planning. Spousal protections, exempt assets, spending for fair value, insurance, family support and private payment may also shape the answer. Sometimes a simpler arrangement serves the family well.
Creditor protection is another distinct question. A trust designed for benefits eligibility is not automatically a general shield from creditors. Likewise, estate recovery and a trust’s specific repayment obligation must be considered separately. We aim for a coordinated plan whose purpose and practical consequences are clear.
Contact Verras Law to arrange a conversation with Spiro Verras in Palm Harbor, by appointment in Tampa or St. Petersburg, or by Zoom or teleconference.