by Thomas D. Begley, Jr., CELA
Many clients who use Children’s Trusts as part of their Medicaid planning are non-crisis planning clients. They either have an early diagnosis or are elderly but in good health. They are doing advance planning and want a sense of independence. They do not want all of their assets in a trust. Good practice dictates that the lawyer have a discussion with the client and determine how much the client feels should be kept out of the trust to give the client a feeling of comfort. The client should understand that the funds retained outside the trust are at risk, unless they are transferred to children to be held pursuant to the terms of a Family Agreement. Ideally, the trust will be funded with the least amount of assets possible. In calculating how much to put in the trust, the client can carve out assets that can be used in the future for the following:
- Amount of Community Spouse Resource Allowance (CSRA);
- Amount of the anticipated spend down as set forth in the client’s Asset Protection Plan;
- Key money to gain admission to a facility; or
- Any amount of money the client is willing to lose. Typically, a single client will want to retain $50,000 – $100,000 of assets and risk losing that amount in order to preserve a sense of independence. To a certain extent, this will be determined by the medical condition of the client.
Ideal assets to fund a Children’s Trust would include appreciated real estate, such as a primary residence or a vacation home, or appreciated securities. There are significant tax advantages in utilizing trusts for these assets as opposed to transferring outright to children. Careful consideration must be given to rental real estate, because the parent would no longer be entitled to the rent after the property is transferred to the Children’s Trust.
Bad assets to use in funding trusts include retirement accounts, deferred annuities, and government bonds with significant accumulated interest. The problem is the transfer of those assets would result in immediate income tax. To the extent possible, these assets should be left outside the trust.
A Children’s Trust can be designed as a grantor trust so that the grantor pays the tax on any income, or .a non-grantor trust where the income is taxed either to the trust itself or to the beneficiary, depending on the design of the trust.
A Children’s Trust can be designed so that the Grantor retains a limited power of appointment over the trust corpus. The limited power of appointment would enable the Grantor to appoint the remainder of the trust to a limited class of people. Limited power of appointment could be either testamentary or inter vivos.
If the trust is designed as a grantor trust, then the assets in the trust will be included in the estate of the grantor for estate tax purposes. The Children’s Trust can be designed so that it is not a grantor trust and the assets in the trust would be excluded from the estate of the grantor for estate tax purposes. In determining how to draft the trust, the capital gain tax saving resulting from a step-up in basis must be weighed against any estate tax savings. Usually, payment of the New Jersey estate tax is the lesser of the two evils.