An irrevocable trust is a legal provision that allows a person, known as a grantor, to place assets into the trust that will be managed by another person, called a trustee. The recipient of the trust is the beneficiary, who in most cases may also be the grantor. However, the irrevocable nature of this trust is such that the grantor cannot change the terms of the trust agreement once it is set. While a person might set up an irrevocable trust to pay for medical expenses, a trust can also be used to shelter income or assets, allowing the beneficiary to become eligible for Medicaid or SSI benefits. This is especially true in cases where a direct gift of the funds to the beneficiary would put him over the income levels, and disqualify him for benefits.
Special Needs Trust
If a person is permanently disabled and in an institution before the age of 65, a parent, grandparent, legal guardian or court can create a special needs trust to supplement Medicaid benefits for the beneficiary. You cannot set up a special needs trust for your own benefit, however. While this type of trust cannot be used to pay for medical bills directly, it can be used to make the disabled person more comfortable within the institution. For instance, someone confined to a wheelchair might be more comfortable with a scooter or a power chair. In most cases, a special needs trust is set up as an irrevocable trust, so that the beneficiary will receive the trust funds no matter what happens to the grantor or trustee.
Irrevocable Trust for Another Party
Another common irrevocable trust is one in which the grantor of the trust places assets in the trust that she wants to give to someone else, whether that person is a family member or an heir. The grantor of the trust would then become eligible to receive Medicaid, since she no longer has control over the income or assets within the trust. Any income or interest the trust receives could be used to pay for medical expenses, and Medicaid would pay for the remaining expenses.
In some states, a special irrevocable trust, called a Miller trust, can be established where the grantor of the trust is also the beneficiary. All income would be transferred into the trust, then the trustee would pay the beneficiary's medical bills from the trust's income, and Medicaid would cover the balance of the expenses. This type of trust dictates that upon the beneficiary's death, all amounts paid by Medicaid would be reimbursed by the trust. Medicaid's reimbursement upon the death of the beneficiary is a stipulation of a Miller trust.
Taxes on Irrevocable Trusts
Because the grantor of an irrevocable trust no longer has access to the assets of the trust, many people will place their assets into an irrevocable trust. This allows the grantor to retain control over and access to the funds without actually owning them. For instance, if a grantor had $100,000 in a savings account that he wanted to protect, he could place that into a trust, and the terms of the trust would determine how the money would be used. There are still taxes paid on the property in the trust, but the amount paid is often considerably less than had the grantor kept the money in his personal account. Additionally, if a trust is set up specifically for paying another person's medical expenses, the gift would be excluded from IRS gift taxes.
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- Duko Trust Attorney: Medicaid Qualifying Trust
- Free Advice: Law - Irrevocable Trusts
- Cushing & Dolan: Irrevocable Trusts - Not as Frightening as You Might Think
- Estate and Elder Law: How to Use an Irrevocable Family Trust During Life in Estate Planning
- Gianelli & Polley: The Value of Using Irrevocable Trusts in Medicaid Planning
- IRS: Frequently Asked Questions on Gift Taxes
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