- Dennis Fordham
- Posted On
Estate Planning: Using irrevocable trusts in needs based benefit planning
Medi-Cal and VA “needs based” benefits planning confronts both front end eligibility issues and back-end estate recovery issues. Medi-Cal and VA benefit rules differ.
Planning for both together, when relevant, requires satisfying two different sets of rules. Such planning often involves transfers of real and personal property by the person seeking needs based benefits.
Outright transfers, especially to persons other than the spouse, may create undesirable consequences. Transferring assets into an irrevocable trust may sometimes provide a better solution.
The irrevocable trust is a very different instrument than the revocable living trust used to avoid probate and conservatorships.
Often the most important asset being transferred is the person’s home. This is done not for eligibility reasons but to avoid estate recovery after the needs based benefits recipient (and any surviving spouse) dies.
An outright transfer, however, creates the following issues: (1) the new owners may either sell the residence or lose it due to their creditors or divorce; (2) the new owners do not necessarily get a new basis at the death of the former owner (unless a life estate or lifetime occupancy interest is retained by the transferor); and (3) should it ever becomes necessary or desirable to sell the residence and buy a new residence elsewhere then doing so becomes very problematic.
Instead, transferring the home into an irrevocable trust – with the transferor retaining lifetime benefits – provides both flexibility and protections.
First, inside the irrevocable trust, the residence is protected against the creditors and or ex spouses of the trustee or the death beneficiaries; which is not the case had these persons held title in their name outright.
Second, the trustee can sell the residence and acquire a new one should the need arise without legal difficulties.
And, third, after the settlor dies, the death beneficiaries receive an adjusted basis equal to the appraised value at date of death (as opposed to a transfer basis based on the purchase price plus or minus any adjustments).
The transfer of assets often becomes a major obstacle itself when the transferor is incompetent if he or she had not, while competent, previously conferred legal authority on an agent to make such a transfer during the principal’s incompetency.
Such authority would need to be in the transferor’s power of attorney and, if relevant, also in the transferor’s living trust. Otherwise, a court petition becomes necessary.
Next, that the trust is irrevocable creates its own set of issues because such a trust cannot, except under certain limited conditions, be modified. Thus to deal with such eventualities, a properly drafted irrevocable trust provides for a trust protector.
As power holder, the trust protector can (1) modify the trust to conform with future changes in relevant laws; (2) replace a non performing trustee or filling a trustee vacancy; and (3) modify who inherits, and how they inherit, after the settlor dies.
In addition, the trust also needs to address income tax issues such as preserving the $125,000/$250,000 (single/married) capital gains tax exclusion on the sale of one’s principal residence at a gain.
Separate state and federal income tax returns must be filed by the trustee under the trust’s own separate taxpayer identification number.
Needless to say an irrevocable trust costs much more to draft than the garden variety revocable living trust that is used to avoid probate.
In the right situation, however, the benefits can quickly pay for themselves if and when the settlor ever receives needs based benefits.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 870 S. Main St., Lakeport, California. Fordham can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .