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.