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Document-428338_1920 After interrupting this two-part series on trusts to highlight Prince’s death and his lack of estate planning, this month we are going to pick up where we left off in March with further information about using trusts for Medicaid and VA planning. As we discussed in March, irrevocable trusts are often created for Medicaid planning to remove assets from a person’s estate since assets held in that manner are not considered available to the Medicaid applicant if he needs Medicaid to pay for nursing home care. However, as we also discussed, transferring assets into a trust will create a penalty period where the Medicaid applicant will not be eligible for Medicaid for a period of time. This penalty period will be imposed for any transfers made to a trust within five years of applying for Medicaid. This penalty period is often a trap for the unwary. There are also many other aspects of trust planning that require specialized knowledge and that can cause problems if not handled correctly. Trust taxation is one of those areas. Trusts can be taxed in several ways and understanding trust taxation before engaging in trust planning is essential. Typically, a trust is a separate taxpaying entity and it gets its own tax identification number and must file its own income tax return. However, depending on the type of trust, income taxes may be paid at the trust level or they may be paid by the beneficiaries of the trust. Trusts reach the highest tax rate at a much lower income level than do individuals so choosing the right type of trust to minimize income taxes is very important. There is even a type of trust, called a “grantor” trust, where the income taxes are paid by the individuals who created the trust even though they no longer have any access to the assets held in the trust. A “grantor” trust is often used in Medicaid planning. A special needs trust is also not considered a resource for Medicaid purposes so it is also used for Medicaid planning in certain circumstances. A special needs trust is often used for a disabled beneficiary under the age of 65. Although the principal of this type of trust may be used for the Medicaid recipient it is not a countable resource because of special laws applicable to those considered disabled according to SSA guidelines. Trusts may also be used for those applying for VA Aid and Attendance benefits. Like Medicaid, Aid and Attendance is only available to those who have limited assets and trusts are often used to meet the asset requirements for this program. Unlike Medicaid, VA does not currently have a look back period for transferring assets to a trust. However, a 3-year look back period is likely to be imposed as early as this year. Although VA does not currently have a look back period, a “grantor” trust that is acceptable when used for Medicaid planning, may cause ineligibility for VA benefits. Since the income from the assets held in the “grantor” trust will show up on the income tax return of the person who created the trust, the VA may consider this trust an available asset even though that person has no ability to access any of the trust’s assets. The VA has also considered assets held in a special needs trust as available assets for the beneficiary even though Medicaid law is clear that the assets held in that type of trust are not available for Medicaid purposes. Trusts are not “one size fits all” and a trust that may work for Medicaid planning may not work for VA planning. Additionally, complicated tax rules apply to trusts so they must be carefully drafted and administered if they are to work as intended. Although trusts are important planning tools for protecting assets from the high costs of long-term care, I cannot overemphasize how important it is to consult with professionals well-versed in trust law and taxation before engaging in any type of trust planning to protect your family and your assets. The information provided is not intended to be legal advice and does not constitute an attorney/client relationship. You should consult with an attorney for individual advice regarding your own situation. Ms. Melancon has engaged in the practice of law in Ascension Parish for the last eighteen years. The primary focus of her practice is estate planning, probate, special needs planning and elder law. For more information or to attend an upcoming estate planning seminar, call her office at (225) 744-0027.

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