| GIFTS FROM A MEDICAID TRUST
CLIENT QUESTION:
Dear Mr. Lawrence Davidow:
I’d like to thank you in advance for all the valuable estate planning advice you share with us. The following is my question:
My wife and I currently have an irrevocable trust that you created approximately 7 years ago. Fortunately, it has grown substantially. My daughter is the trustee and my beneficiary. What is the proper procedure for her to take part of her inheritance from the trust, in advance, for the purchase of a primary residence for herself? How do we document the transaction, and are there tax issues?
MY RESPONSE:
Thank you for your kind words. I am delighted to hear that the trust has performed well and that your daughter is preparing to purchase her own home.
The Irrevocable Medicaid Trust we created contains a provision allowing the trustee to distribute trust principal to the trust beneficiaries during your lifetime, provided that the grantors (you and your wife) consent in writing. Therefore, your daughter is both the trustee and a beneficiary, so she may receive a distribution from the trust to assist with the purchase of her residence, provided that the required written consent is obtained.
The consent does not need to be complicated. A simple signed writing stating that you, as grantors of the trust, consent to the trustee making a distribution of trust principal to a named beneficiary pursuant to the terms of the trust is generally sufficient. We do recommend that the consent be dated and retained with the trust records.
As for taxes, a distribution of trust principal to a beneficiary is generally not considered a gift from you to your daughter because the transfer is being made by the trust pursuant to its terms. In most cases, there is no gift tax consequence to the grantors. There is also typically no income tax consequence simply because the trust principal is distributed. However, since the trust assets have significantly appreciated, or if unusual assets are involved, we should review the specific facts before the distribution is made.
One of the reasons we draft our Medicaid trusts this way is to provide flexibility. The trust protects assets for Medicaid planning purposes while still allowing beneficiaries to receive distributions when appropriate. We do not want families to feel that assets are locked away for the rest of the grantors’ lives.
Congratulations on your financial success and on your daughter’s purchase of a new home! If you would like assistance preparing the consent document or reviewing the proposed distribution, please let us know. |
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