An irrevocable asset protection trust is often the best means of protecting your home or other appreciated assets from MassHealth. However, MassHealth will only consider the trust assets to be a non-countable if the trust meets certain requirements.
Irrevocable
First, the trust must be irrevocable, meaning that you cannot change it or demand that the trust assets be returned to you. The trust can, however, contain language which would allow you to appoint a new trustee. The trust also can give you a so-called “power of appointment,” which allows you to change the interests of the beneficiaries named in the trust by changing your will. However, once you place an asset into your irrevocable trust, you no longer own it, the trust does. You can, however, still benefit from the trust asset in many ways.
Principal and Income
Second, according to the terms of the trust, none of the trust principal can be paid to you under any circumstances. This limit on the return of principal is critical in making sure that the trust assets are protected from MassHealth. It may be helpful to think of your trust like a locked safe, that is, although assets placed into the trust must remain in the trust, they can be sold. For example, if real estate is placed in the trust and it is subsequently sold, the proceeds from the sale must remain in the trust. The trustee could use the proceeds to purchase a new home for you; however, the new home would be titled in the name of the trust.
In addition, you would have a continuing right to live in any real estate owned by the trust. Additionally, the interest and dividends earned on the trust property, or rental income, can be paid directly to you. Since you no longer own the property held in the trust, you will most likely be unable to mortgage or take out an equity loan on the property.
Medicaid Eligibility
Transferring assets into an irrevocable trust makes the applicant and his spouse ineligible for MassHealth for five years from the date of the transfer. It is critical that you not file a MassHealth application until the five year Alook-back period@ has passed. If you apply too soon, you may make the applicant and his spouse ineligible for MassHealth benefits for a period exceeding five years.
Taxes
Our irrevocable asset protection trusts are written so that if your home or other appreciated assets are sold after your death, your heirs will receive a so-called step-up in the tax basis. This means that the ultimate beneficiaries of the trust will pay little or no capital gains tax if they decide to sell property after your death. If your primary residence is owned by the trust and is sold while you are alive, you will be able to utilize your $250,000 capital gains exclusion ($500,000 for a couple).
The trust property will be included in your taxable estate. A Massachusetts estate tax will only be owed upon the surviving spouse’s death if your total gross estate exceeds $1 million (including the trust assets).
If you only place real estate into your irrevocable trust, you can continue to file your annual income tax returns, as you have in the past. Accordingly, you will not need a new tax identification number for the trust. Furthermore, you will still be able to claim any deductions on your tax return related to your home.
If, however, you place liquid assets into your trust, you will need to apply for a new tax identification number (EIN) and file an annual trust tax return. The trust is drafted so that all of the income earned on the trust assets will be taxable to you. You should contact your accountant so that he can complete the necessary tax forms for the trust.
Probate
Any property held in the trust will avoid the probate process and pass directly to the beneficiaries named in the trust. Should you ever wish to change the beneficiaries of the trust, I would recommend that you contact our office so that we can further assist you.
Other Implications
Placing your home into an irrevocable trust may cause you to lose tax abatements to which you would otherwise be entitled. Additionally, if you have recorded a homestead on your primary residence, and then, subsequently transfer your home into an irrevocable trust, you may lose the protection afforded by the homestead. Also, if you currently have a mortgage on your property, it may technically become due upon transferring the property into an irrevocable trust. You will not be able to take out a new mortgage or refinance an existing mortgage on property transferred to an irrevocable trust. Finally, immediately after transferring your home into an irrevocable trust, we recommend that you inform your insurance company so that they change the homeowner=s policy to reflect that the trust is the new owner.
As always, please contact a Pabian & Russell elder law attorney if you want to learn more about assets protection trusts or other MassHealth planning strategies.