LISTEN TO LAWRENCE
Dear clients and friends,
Here are two questions from one of my readers:
We have an Irrevocable Medicaid Asset Protection Trust with your firm. First question is concerning interest income from a trust savings account, would Medicaid be able to take the interest (if applying for Medicaid) either before the 5 year look-back or after? If so, should we be taking out the interest income or leave it there? We also have an annuity in the trust which gains interest which we do not touch.
The answer to your question depends upon how you and I decided to draft your trust. With every trust I create, a decision has to be made regarding how to handle trust income. Sometimes, I draft it so that all trust income is paid back to you each year. Some clients like this because it gives them a certain amount of security knowing that they will absolutely be getting the trust income, which they may depend on to pay bills. In such a case, the income must be paid out even if you don’t want or need the income, like with your annuity.
The problem with this approach is that if you can get the income, Medicaid can get the income. This is why I rarely draft my trusts this way. The answer does not change if we are within or beyond the five year look-back.
More often, I draft the trust so that the income accumulates in the trust or, upon your direction, it can be paid out to your trust beneficiaries (usually your children). Interestingly, if the income accumulates in the trust or is paid out to your beneficiaries, you will still pay the tax at your rate; the trust or your beneficiaries will not pay any tax while you are living. One caution with this approach is that if the trust pays the income to you or for your benefit, contrary to the terms of the trust, then the trust will no longer work to protect your assets from Medicaid. You have to play by the rules.
Our second question is that we would like to know if we can give money to our children and grandchildren from a regular non-trust savings account and if so, what would be the maximum amount we could give to them?
You can always make gifts to your family. If we are talking tax, New York
has no gift tax and the federal government currently has a gift tax exemption of $11,580,000. The $15,000 per person, per year rule that most people know about is a reporting issue, that is, if you give more than $15,000 per person, per year then you are supposed to file a gift tax return…but no tax will be due until you give away more than $11,580,000.
If we are talking about Medicaid, then these new gifts can be made but will be subject to a 5 year look-back.
The bottom line is that you may want to talk to us before making gifts. While there may be no issue regarding taxes, the Medicaid issue needs further discussion.
I hope this helps! Please forward this information to your friends and relatives.
As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.
Let’s stay connected.
LISTEN TO LAWRENCE