A couple months back, I wrote about the Medicaid Rules, how they apply to your home, and introduced the Medicaid Asset Protection Trust. This month, I would like to further explain the Medicaid Asset Protection Trust and how it is used to protect your home.
To start, let’s review the general structure of a Medicaid Asset Protection Trust. You would be the one to establish the trust. You would appoint a child who you trust to be in charge and act as trustee. The trust would be for the benefit of your children. In general, it would be irrevocable. In other words, it could not be changed and would not be for your benefit. You would then transfer assets to this trust and if you did it at least 5 years before you needed care in a nursing home, those assets would be protected.
Let me further explain how a Medicaid Asset Protection Trust can be used for your house. You would transfer 99% of the ownership into this trust, this would allow you to retain 1%. This retained 1% is very important because without it, you would lose the home as a Principle Residence Exemption. This would increase your taxes between 25%-48%. For your 1% ownership, you would sign a deed that provides upon your passing that interest would go directly to your trust and avoid probate.
It is also very important that the trust be taxed in a certain way for income tax purposes. If you live in the home and then move directly to a nursing home and it is sold, this tax structure will allow your child, acting as trustee, to avoid capital gains tax on the increase in value from when you purchased the home.
It is also very important that the trust include another provision regarding taxation. If your family decides to hold onto the home and not sell it until after you pass away, you want to make sure that the sale will also avoid capital gains tax. The way this is accomplished is for you to retain a certain right that’s called a Power of Appointment. While this is quite technical, it is extremely important to use in the Medicaid Asset Protection Trust as it will avoid this tax if the home were to be sold after you pass away.
If you have any questions regarding Medicaid Asset Protection Trust and how it can be used to protect your home, feel free to contact me.