If one is making gifts as part of Medicaid/nursing home planning, then making the gifts to the trustee of a Medicaid trust is a safer alternative than making the gifts directly to someone else.
If one faces a long term stay in a nursing home or assisted living, then usually that person would like to preserve their assets instead of spending them all on nursing home costs. With careful planning, one can make gifts, qualify for Medicaid, have Medicaid pay for the nursing home, and keep some of the assets in the family.
One must have someone they completely trust participate in this planning. If one makes gifts, then the person has no legal power to retrieve the gifts. Thus, if the person making the gifts needs the money, then he has to hope that the recipient of the gifts is ready, willing, and able to give some of the money back.
Even if one completely trusts someone to do this, it is wise to limit the risks that the assets will be lost. Giving money to a person is risky. They can die, divorce, file bankruptcy, or have other tragedies occur.
Setting up a Medicaid trust, and making this special person its trustee, helps to limit these risks. If the person as trustee owns the assets, then the assets do not belong to him personally. Instead, they belong to him as the trustee. As a result, these assets are not liable for that person’s debts. The assets also do not pass through the person’s estate if he dies. If there is a divorce, then they are not available for payment to the ex-spouse. If he files bankruptcy, then the bankruptcy trustee will not take the assets.
A Medicaid trust is not like a revocable living trust. One cannot change the Medicaid trust. It must be irrevocable. The person making the gifts cannot be the trustee or a beneficiary. If the person is the trustee or a beneficiary, then an Ohio Medicaid caseworker will claim all of the assets inside the trust are available for that person. If the trust has more than $1500, then the person will not be Medicaid eligible.
Most Medicaid trusts have a son or daughter as the trustee. This same son or daughter, and usually one or more siblings, are beneficiaries. If the parent who made the gifts needs money, then the trustee gives funds to one of the parent’s children. These children then make the money available for the parent.
Medicaid trusts require careful management and paperwork. The trustee must make distributions only to the beneficiaries. If the trustee makes distributions directly to the gifting parent, then he will violate the trust’s terms. The trust requires its own tax identification number. If it earns more than $100 a year, then the trustee must prepare and file a 1041 return. The parent will have to file a gift tax return for the items placed in the trust.
For the Medicaid planning to work, the gifting parent must transfer assets to the trustee of the Medicaid trust. This requires deeds, assignments, and re-titling of other assets into the trustee’s name.
Medicaid trusts normally hold all of the assets until the parent dies. Once the gifting parent dies, the Medicaid trust distributes the assets to the beneficiaries named in the trust. This avoids the fees, delay, and publicity of probate.