I had Mr. Davidow do an irrevocable trust in 2015 and since then I’ve sold my home and put the purchase money in the trust. My question is, I have six grandkids and wanted to give them some money toward college and graduate school. Can I do this without it affecting my look back period and can I claim the money as gifts for tax purposes? Thank you for your help.
The first thing to note is that every irrevocable Medicaid trust is not the same, but I will answer this question with what my trust allows. My trust allows the trustee to withdraw money from the trust and pay it out to the trust beneficiaries, subject to the consent of the Grantor of the trust (you). So, then the next question is who are the beneficiaries of your trust? If it is only your children, then the trustee cannot pay out the money to your grandchildren. One easy solution here is to pay the money out to your children who can turn around and give it to your grandchildren.
BUT WAIT! I put a special clause into every one of my trusts, called a “SPECIAL POWER OF APPOINTMENT.” This clause gives you the power to change (or appoint) different beneficiaries for your trust, usually among a limited class of people, like all of your issue (children, grandchildren, great-grandchildren). So, if you want to, you can exercise your special power of appointment and name your grandchildren as a partial beneficiary, for the amount needed for their education. If this is done, the trustee, with your prior consent, can either pay the money directly to the grandchild or directly to the educational institution for their benefit.
As for gift tax, there should be no gift tax due. First, understand that the way I set up these trusts, there is no gift tax issue when the house or money goes into the trust but will be considered a gift when it goes out of the trust to or for the benefit of your family. While the gift from the trust to or for the benefit of your family (i.e., grandchild) is subject to the gift tax system, it may fall under your $15,000 per person exclusion or if the check is written directly to the educational entity it will be excluded from gift tax without limit. Notwithstanding this, New York has no gift tax system, and the federal government currently exempts the first $11.7 million from gift tax, so the issue of gift tax is irrelevant for middle-class people setting up trusts to protect their assets from long-term care costs.
However, if the gift exceeds $15,000, you are technically supposed to file a gift tax return, even if no gift tax is due. As a lawyer, I will direct you to file these tax returns, but my experience is that most people ignore my advice here.
As for how this all impacts the look-back period, the look-back starts when the assets go into the trust and NOT when they leave the trust for your children and grandchildren.
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