• Why might I consider creating an irrevocable trust?
    • An irrevocable asset protection trust is often an effective means of protecting your home or other appreciated assets from being counted against you if you were to apply for benefits from MassHealth. However, MassHealth will consider the trust assets to be “noncountable” only if the trust meets certain requirements.
  • How do I create a trust?
    • In simplest terms, you create a trust by entering into a written agreement (called the trust agreement) with another person (called the trustee) and by transferring property that you select to the trustee. The trustee agrees under the terms of the trust agreement to hold the property transferred to the trustee and to dispose of it for the benefit of persons identified in the trust as the beneficiaries. The trustee could be one or more individuals or an institution such as a trust company that is in the business of acting as a trustee.
  • What is an “irrevocable” trust?
    • In order for assets transferred to a trust to be “noncountable” for MassHealth purposes, the trust must be irrevocable. This means that once you have created the trust and transferred assets to the trustee, you cannot change the terms of the trust agreement or demand that the trust assets be returned to you. The trust agreement can, however, contain language that would allow you to appoint a new trustee. The trust agreement can also give you a so-called “power of appointment,” which would allow you to change the interests of the beneficiaries named in the trust agreement by changing your will. However, once you transfer assets to a trustee of an irrevocable trust, you no longer own the assets – the trustee does. You may, however, continue to benefit from the trust assets in many ways.
  • In what ways can I continue to benefit from the principal and income of the trust?
    • The trust agreement must provide that none of the trust principal can be paid to you under any circumstances. This limit on the return of principal is critical in making sure that the trust assets are “noncountable” for MassHealth purposes. It may be helpful to think of your irrevocable trust as being like a locked safe, that is, property transferred to an irrevocable trust must remain in the trust. However, the trustee can sell trust assets. For example, if real estate is placed in the trust, it can be subsequently sold, but the proceeds from the sale must remain in the trust. The trustee could use the proceeds to purchase a new home in which you could live; however, title to the new home would be held by the trustee.
    • In addition, you could have a continuing right to live in any real estate owned by the trust. Additionally, any interest or dividends earned on the trust property and any rental income from real estate owned by the trust could be paid to you. However, since you no longer hold title to the property held in the trust, you would be unlikely to be able to obtain a mortgage loan or equity loan secured by trust property.
  • How will creating an irrevocable trust affect my eligibility for Medicaid?
    • If you transfer assets to an irrevocable trust you and your spouse become ineligible for MassHealth benefits for five years starting with the date of the transfer. It is critical that you not file a MassHealth application until the five year “look-back” period has expired. If you apply too soon, you and your spouse may become ineligible for MassHealth benefits for more than five years.
  • What are the tax considerations?
    • An irrevocable asset protection trust agreement can be drafted so that your home and other appreciated trust assets will receive a “step-up” in tax basis at the time of your death. This means that the beneficiaries of your trust who receive the assets will pay little or no capital gains tax if they decide to sell the assets after your death. If the trust owns your primary residence and sells that property while you are alive, you will be able to utilize your $250,000 capital gains exclusion ($500,000 for a couple).
    • The trust property will be included in your taxable estate.   See “Estate Planning Terms – Estate Tax” on this website for further information.
    • If you transfer only your home to your irrevocable trust, you can continue to file your annual income tax returns as you have in the past. You will not need a new tax identification number (EIN) for the trust. Further, you will still be able to claim any deductions on your income tax return related to your home.
    • If, however, you transfer liquid assets or other income earning assets to the trust, your trustee will need to apply for a new EIN and file an annual income tax return for the trust. You should contact your accountant for assistance with the necessary tax filings for the trust.
  • Does and irrevocable trust reduce probate expenses?
    • Property held in the trust will pass directly to the beneficiaries named in the trust agreement and will avoid the probate process. Changing the beneficiaries of an irrevocable trust requires special care and I would be available to assist you with the process.
  • What other implications should I keep in mind?
    • Transferring your home to an irrevocable trust may cause you to lose tax abatements to which you would otherwise be entitled.
    • If you have recorded a homestead declaration on your primary residence and subsequently transfer your home to an irrevocable trust, you may lose the protection afforded by the homestead declaration.
    • If you have a loan secured by a mortgage on your property, the loan may technically become due upon transferring the property to an irrevocable trust. You may not be able to take out a new mortgage loan or refinance an existing mortgage loan on property transferred to an irrevocable trust.
    • At the time of any transfer of your home to an irrevocable trust, you should contact your insurance company so that the homeowner’s insurance policy can be changed to reflect the new ownership.

The information provided here is a summary only and does not take into account your individual situation. Please contact me at North Shore Elder Law & Estate Planning to learn more about asset protection trusts or other MassHealth planning strategies.