For Probate and Estate Settlement Clients: Estate Assets Checklist and Certification Form Protecting Your Home and Other Assets from Long Term Care Costs with an Income Only Irrevocable Trust
To protect your home and other assets from creditors and long term care costs, consider using a Trust agreement to hold ownership of those assets. Trust agreements that do the job of owning and protecting assets must be irrevocable, meaning that you can't change your mind after you have transferred property into the Trust. But the tax and trust laws do allow flexibility about how assets in the Trust are managed and distributed.
Example: A Single Person Who Is Planning for Future Long Term Care Needs
Mrs. Inga Olney enjoys her home and large yard. In every way, the property is her most valuable asset. After caring for her spouse during a terminal illness several years ago, she became aware of the costs, challenges and choices that go with care giving.
She now has time for gardening, for frequent outdoor picnics and parties hosted for her adult children, her grandchildren, and friends from church and the community. Her golden retriever also has plenty of room to run and enjoy the outdoor air.
A recent diagnosis brought Inga to the place in life where procrastination is no longer a realistic option. Because of the diagnosis, she is not likely to qualify for long term care insurance, which could have made her home exempt from Medicaid estate recovery under current Massachusetts laws.
Inga's philosophy of treasuring each day as special and unique opportunity to enjoy and serve her friends and family has always been a source of encouragement. She is not likely to need nursing home care within the next 5 years, but she knows that the coming years will bring new challenges, and she will have to stay flexible and creative in her approach to life, living, and how she manages her assets.
Inga decided that an Income Only Irrevocable Trust would be the best way to hold ownership of her home, and some of her other assets. This type of Trust goes by many names, depending on who you are talking to. No matter what you call it, the Trust is Irrevocable, and it only provides Income to the Grantor. The Grantor is Inga.
By transferring her home and other assets to the IOIT, Inga gave up ownership of those assets. If Inga applies for nursing home assistance from Medicaid after 5 years from when she funded the Trust, Medicaid should not consider her the owner of anything in the Trust. If other creditors come along, they also should be unable to take anything from the Trust.
Unlike Medicaid, the IRS does consider Inga to be the owner of the Trust assets. They treat the Trust as if it does not exist. By keeping certain powers over what happens to assets in the Trust after she dies, the IRS considers Inga to be the owner of the house and other assets. So, the house will still be covered by the Principal Residence Exclusion if the day comes when the house needs to be sold during Inga's lifetime. (Inga can move to assisted living or another residence, sell the house, and avoid paying capital gains taxes).
And if the home is not sold before Inga's death, the home will be part of her estate. So, her children will get the benefit of a step - up in basis (they won't have to pay a capital gains tax if they sell the house after Inga's death).
Inga decided to designate one of her adult children as Trustee. Her children and her grandchildren are the beneficiaries of the Trust upon Inga's death. If the Trustee child does not handle things properly, Inga can change the beneficiaries, and the adult child Trustee won't get a dime.
The Trustee is responsible to give Inga the benefits from Trust property, and any income that the Trust assets produce during Inga's lifetime. The Trustee has the ability to buy, sell, rent and manage any of the assets in the Trust, for Inga's benefit. She gets to live in her house for as long as she wants to. If the house is ever sold, she gets the income from the sale proceeds that are held in her Trust.