by Thomas D. Begley, Jr., CELA
A common Medicaid Planning strategy is to transfer assets to third parties, wait for the five-year lookback to expire and apply for Medicaid. If assets are transferred to children, there are certain risks to be considered. If the child is sued by a creditor, the assets transferred by the parent to the child are subject to the claims of the creditors. If the child is subsequently divorced, the son or daughter-in-law may be able to claim additional funds by virtue of the assets that were transferred by the parent to the child. Basic divorce law says that so long as the transferred funds were not co-mingled by the child and the child’s spouse they are not subject to claims for equitable distribution, but Family Law practitioners all advise that the judge will figure out something else to give the son or daughter-in-law and advise against this strategy. If the child to whom the assets are transferred dies, the parent’s assets can be left by the child’s Will to the child’s spouse or, absent a Will, the child’s spouse will normally inherit by intestacy.
An alternative would be to transfer assets to a Children’s Trust. Under the Children’s Trust, one or more of the children could serve as trustee. The parent would give up all access to the principal being transferred to the trust and any income earned by that principal. The trust could provide that distributions could be made to a child from the principal and/or income. After five years, the assets transferred to the trust would be out of the parent’s name and would not be counted for Medicaid eligibility purposes.
Ideal assets to fund a Children’s Trust are depreciated assets. A primary residence may be the best choice for funding the trust. A second home is also a good choice, particularly if it has appreciated in value.
Retirement accounts are never a good asset to fund a Children’s Trust, because the income tax on the retirement account would have to be paid when the funds are withdrawn to fund the trust.