Client, a 78 year old widow in the early stages of experiencing dementia, creates an irrevocable trust which gives her the right to occupy her homestead which was deeded into the trust. Her goal was to save her homestead (or the proceeds therefrom if sold during her life) for her children should she ever need long-term care Medicaid benefits. Since the trust is irrevocable, the deed into the trust started the clock on Medicaid’s five year look-back period as the government presumes that the transfer was purposefully done to reduce assets to obtain Medicaid eligibility so that the government would help pay for long-term care (if the Medicaid applicant is single, then the applicant would only need to pay their income, typically Social Security or pension, as a co-payment and the government would pay the nursing home the excess in addition to paying for the drug costs).

Although a homestead is a non-countable resource if the home equity (for a person who is single) is under $582,000 (some states the equity limits exceeds $800,000), the property could not be sold during the life of the Medicaid recipient (unless non-countable resources are purchased in an equivalent amount) since a person who is single is only entitled to $2,000 of countable resources. Thus, if the house is sold and it had not been deeded into the trust, then the case proceeds from the sale of the home would result in a spenddown of the cash due to the $2,000 countable (cash counts) resource limit.

The irrevocable trust was designed to be tax-neutral. In other words, the client (1) still receives the over 65 and homestead property tax exemptions; (2) could sell property and there would be no capital gains on the first $250,000 of appreciation from her basis; and (3) her beneficiaries would receive a step up in basis to the value of the homestead at her death if the property was still held in the trust at her death.

The client also realized that the transfer penalty for deeding the property into the irrevocable trust could be neutralized by simply having the trust deed the property back to her should she need to go into a nursing home within five years – and that is what happened as her health declined three years after the property was initially deeded into the trust. The Texas Medicaid rules provided that if something is transferred without compensation and it is returned to the donor, then there is no transfer penalty.

Finally, the client’s goal was to save the homestead from estate recovery since Medicaid is entitled to recovery against non-countable resources such as a homestead or car if the homestead or car passes by the Will or intestacy (when one doesn’t have a Will) of the Medicaid recipient to the extent Medicaid benefits are advanced. As a result, the agent for the client (since the client no longer has mental capacity) under her Power of Attorney then signed a Ladybird (enhanced life estate) deed which is an exception to a successful claim by the state for estate recovery since the property will pass by deed (not by Will or intestacy). The agent was given this specific power along with the power to deed to the agent under the Power of Attorney signed at the same time she signed the irrevocable trust and the deed into the trust as it was anticipated that there was a possibility her health could decline within the five year look-back period (although she thought she would not need long-term care within five years when the trust was initially established). So, even though her health didn’t hold up as she originally thought that it would, her goal to pass the property to her children at her death and to obtain Medicaid eligibility to help pay for care costs without spenddown and without adverse tax consequences was accomplished.

If interested in learning more, consider attending our next free “Estate Planning Essentials” Workshop on Thursday, May 23, 2019 at 1:00 p.m. by calling us at (214) 720-0102 or signing up online at www.dallaselderlawyer.com or by clicking here. We are also having a Facebook Live Event on Saturday, May 4, 2019 from 10:00 a.m. to 11:00 a.m. Attendees of the live webinar (and the “Estate Planning Essentials” workshop) will be eligible for a free one hour vision meeting with Michael B. Cohen. Please RSVP to the “Facebook Live Event” by clicking here and then click “going” to submit your questions for Michael B. Cohen (you must be logged in to Facebook in order to RSVP). You may also submit your questions for the “Facebook Life Event” by clicking here.

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