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Ask Nancy…

Nancy BurnersmQuestion: My mother has an irrevocable trust she set up for Medicaid planning purposes. My sister is the trustee and she is paying moms bills from the trust.  Is that correct?

Answer: .No, if the irrevocable trust was set up properly to protect your mom’s assets in case she needs long term care from the Medicaid program, then your sister is not correct.

An irrevocable trust of this kind is meant to protect the principal of the assets placed into it. This may be a residence, brokerage account, bank account, etc. Your mom is only entitled to the income earned on the assets. Therefore, to the extent your sister paid the bills beyond the amount of income produced by trust assets, she improperly invaded the trust, which can put all trust assets in jeopardy.

The concept behind this type of trust is that since mom is not able to access the accounts in the trust beyond the income, she cannot use those funds for her long term care costs and can seek assistance from the Medicaid program. If your mom needs long term care in the home, including a personal care aide to assist her with activities of daily living, then the assets properly held in trust are not considered hers for eligibility purpose starting on the first of the month after which she transfers the assets into the trust. If your mom needs to reside in a skilled nursing facility, then the assets must be in the trust for five years before they will be deemed unavailable to her for eligibility purposes. As you can imagine, if Medicaid sees that your mom is using the trust principal for her benefit, it would be expected that she would also be able to use that money to cover the cost of her care.
The benefit of your mom receiving the income from the trust is two-fold. First, it is additional monies she can use to pay expenses, and second, the income is then taxable to your mom at her income tax rate which is most likely much lower than the tax rate paid by a trust. This is often also a lower tax rate than would be paid by you and your sister if your mom had given the assets to you outright.  This trust income plus other income, which often includes Social Security payments, pensions, and required minimum distributions from retirement accounts, should be used to pay your mom’s bills.  There should also be some money left in your mom’s name in checking, savings or other types of bank accounts.  Even if your mom is on Medicaid, she can keep $14,850 in her name.

If you have not reviewed the terms of your trust in several years you should review your documents with an elder law attorney.  This attorney can explain to you any flaws in the way the trust is being managed and can possibly come up with a cure to the mismanagement that will keep your assets protected.

 

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