Medicaid Planning is one of the most complicated areas of law and finances, and things have to be done exactly right to take advantage of the loopholes found in the 200,000+ rules and regulations. However, making the plan work doesn’t end with the transfer of assets into the trust. Often human nature and the hustle and bustle of modern life can make people forget certain things about working with assets in the Family Irrevocable Trust. Here are three of the most common items that are worth reminding people about.

No-Risk Investments. For at least the first five years after transferring assets into an irrevocable trust, they should be invested in accounts and assets that are guaranteed not to lose money. We hear all of the time that “the stock market is the best way to make money,” and “long-term the market always comes back.” Under normal circumstances, that may be true. However, that time horizon is about twenty years, and most retirees don’t have twenty years for their money to “come back” from a crash, let alone if a crash happens within the five-year lookback period. What we need to avoid is putting $500,000 into the trust, have mom or dad get much sicker much more quickly than anticipated in that next year, and then the market crashes losing 50%. The Medicaid office only cares that $500,000 was gifted and not that only $250,000 remains. So if the plan has to be restructured, the $250,000 may not be enough to carry mom or dad through the next four years and then we are dealing with a catastrophe. It’s far better to look to investments like indexed annuities, short-term CDs, or even just money market accounts, at least for that five year period.

Don’t Write a Check Directly to Mom or Dad. In order for the moving of the assets into the Irrevocable Family to truly be off the table for Medicaid in five years, neither mom nor dad can be a beneficiary of that trust. The way we get around this rule is to make the trustee the beneficiary, who is usually also a close family member, and now they can take any needed money out of the trust, deposit it into their own account, and then turn around and give it to mom or dad or pay for things directly. But if I’ve said it once, I’ve said it a hundred times the Irrevocable Family Trust should not ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, go directly from the trust to mom or dad. (Yes, that actually is 100 times, but it is worth repeating).

Taxes. Once a Family Irrevocable Trust has money in it, then there needs to be a 1041 trust income tax return filed each year. There are two options with the trusts we set up: 1) the 1041 reports all income, capital gains, and other taxes and pays those taxes; or 2) the 1041 is filled out without any income, capital gains, and other taxes reported but with the notation that all such taxes are being claimed on the trustee’s 1040 tax return. In many cases, the individual tax rates are much lower than the trust tax rates, so the family comes out ahead when the trustee simply claims the added taxes and takes money from the trust to pay those additional taxes. Because the complexity of handling these kinds of taxes is well beyond the standard tax software, we usually suggest that the parent(s), the trustee, and the trust have their three tax returns handled by the same knowledgeable tax preparer so everything is coordinated. If any of our Medicaid or VA Planning clients have questions on this, please call us first.

No one should ever claim that the mechanics of Medicaid Planning are easy, even though we strive to make things simple for our clients. But because there are government agencies involved, the maxim of “it’s better to ask for forgiveness than to ask for permission” does not apply here, and we ask that our clients and their trustees call us if they are unsure how to handle something with a Family Irrevocable Trust.