Irrevocable Trusts (in Which the Creator Is Not a Beneficiary)

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1 Vertex Wealth Management, LLC Michael J. Aluotto, CRPC President Private Wealth Manager 1325 Franklin Ave., Ste. 335 Garden City, NY Irrevocable Trusts (in Which the Creator Is Not a Beneficiary) Page 1 of 6, see disclaimer on final page

2 Irrevocable Trusts (in Which the Creator Is Not a Beneficiary) What is it? An irrevocable trust (in which the creator of the trust is not a beneficiary) is a vehicle that may help an applicant qualify for Medicaid benefits while preserving substantial assets for family members or other intended persons. It is a legally enforceable arrangement that allows you to transfer property to someone else (the trustee) who holds the property for the named beneficiaries. You can select as beneficiary anyone except yourself, and the trustee should have no discretion (or ability) to direct income and assets to you. The trustee can, of course, be given the power to disburse trust income and/or assets to the named beneficiaries during your lifetime or after your death. How can this trust help you qualify for Medicaid? To qualify for Medicaid, both your income and the value of your other assets must fall below certain limits (which vary from state to state). Assets that are truly inaccessible to the Medicaid applicant are not considered, so anything you put into the trust will be eliminated from your financial picture (for Medicaid eligibility purposes), subject, however, to the applicable "look-back" period. Can using this trust cause any problems? It is important to note that transfers into an irrevocable trust create a waiting period or period of ineligibility before you can start collecting Medicaid benefits. Assuming you transferred assets into an irrevocable trust during the 60-month look-back period, you would be subject to a period of ineligibility (based on a formula) before you could receive Medicaid benefits. When can it be used? You want to preserve otherwise "countable" assets, and you anticipate the need for long-term care Irrevocable trusts are often used to preserve assets when you anticipate the need for future long-term nursing home care. Because a 60-month look-back period for transfers into irrevocable trusts exists, however, such transfers will delay your receipt of Medicaid benefits. Timing of the transfer, therefore, and a prediction as to when Medicaid benefits may be needed are important considerations. Strengths Potentially preserves assets for loved ones Nursing home care is expensive and can easily exhaust your assets. An irrevocable trust may provide a means of qualifying for Medicaid benefits while still preserving some assets for the benefit of your loved ones. Example(s): Assume Ted has a house, a car, income from Social Security, and a pension. He also owns a cottage on Cape Cod that he uses occasionally and rents out most of the time. Ted has always intended to leave the cottage to his only daughter, Leslie. Ted expects to enter a nursing home at some point in the future and would qualify for Medicaid benefits if it weren't for the cottage. If he places the cottage into an irrevocable trust, naming someone else as trustee and Leslie as sole beneficiary, he will likely qualify for Medicaid. If Ted applies for Medicaid benefits within the next 60 months, however, he will be subject to a waiting period (consisting of a number of months) before he can start to collect Medicaid benefits. This period will be equal to the fair market value of the cottage divided by the average monthly cost of nursing homes in Ted's area. Page 2 of 6, see disclaimer on final page

3 Avoids probate Probate can be expensive and time-consuming. If all of your assets are contained within a trust, probate may be avoided and your property disbursed without undue delay. Specifies where trust principal goes after your death The ability to specify what happens to trust principal at your death (appointing principal) is also an important feature. When you establish the trust, you decide who the beneficiaries will be (after careful consideration of all options). During your lifetime, your beneficiaries will be entitled to the income generated by the trust and may be entitled to the trust principal as well. Alternatively, you can allow some beneficiaries to receive income only, and others to receive the balance of the trust principal at the time of your death. The ability to control the money post-death is an important feature to some people. Eliminates gift tax considerations (in some cases) Tip: There is a way to eliminate gift tax consideration with an irrevocable trust--the so-called special testamentary power of appointment. This is important because everything you transfer to an irrevocable trust (in which the creator of the trust is not a beneficiary) is construed as a gift. With a special testamentary power of appointment, you include a provision in your trust document reserving the right to name in your will those people (from among a specified group, such as your children) who will receive the balance of the trust upon your death. According to federal gift tax regulations, you have not made a completed gift of the property at the time of the transfer into trust if you reserve the right to determine who will receive your property at some later time. Thus, the gift tax issue may be avoided. Especially useful in income-cap states Income-cap states set a threshold on the amount of monthly income you can receive if you wish to qualify for Medicaid. You are not allowed to spend down excess income on medical care; rather, if you exceed the threshold by even a dollar, you will be ineligible to receive Medicaid benefits. Because you are not entitled to any income from the assets you put into this type of irrevocable trust (you retained no beneficial interest when you created this trust), you can eliminate these assets from your financial picture to help you qualify for Medicaid. This is a big advantage over the irrevocable income-only trust, which is a more common Medicaid planning tool in other states. Tradeoffs Loss of control over assets The trust should be irrevocable to be an effective Medicaid planning tool. This means that once you have designed the trust provisions and transferred your assets into the trust, you have no further control over the money and are powerless to change or terminate the trust. This can be a serious problem if you establish the trust many years before you enter a nursing home; your assets will be indisposed indefinitely. For this reason, it is probably not a good idea to transfer everything into the trust. But, see below for a possible solution to a family cash crisis. Substantial waiting period can cause problems The look-back period for irrevocable trusts is substantial--60 months--and the value of assets transferred to the trust will determine how long you must wait before you can start to collect Medicaid benefits. Protection of expensive assets, therefore, will cause a longer waiting period. Moreover, if you establish an irrevocable trust and become ill before the end of the look-back period, you will be left without the necessary funds to pay your nursing home bills--and Medicaid won't pick up the tab in the meantime. For this reason, it is advisable to keep some assets out of the trust or to purchase long-term care insurance to cover yourself during the waiting period. Page 3 of 6, see disclaimer on final page

4 How to do it If you are interested in setting up an irrevocable trust, there are a number of steps you should follow: Gather your information Prepare a list of all your assets (and those of your spouse), indicating how title is held, the tax basis, and how much you paid for the asset. Prepare a list of your (and your spouse's) income from all sources. Indicate whether your resources are, for Medicaid purposes, exempt, nonexempt, or inaccessible. Prepare a list of all assets transferred within the last five years, by way of gift, trust, or otherwise. Indicate date of transfer, transferee, purpose, and consideration (what you received in return). Consult a Medicaid law attorney In recent years, the Medicaid laws have undergone a number of changes. Indeed, because certain planning vehicles have been eliminated and many rules tightened, it is reasonable to expect that further changes will occur in the years ahead. It is vital, therefore, to consult an attorney experienced with Medicaid planning if you are interested in planning. An attorney will advise you of your options, make recommendations, and draft the actual trust vehicle to best suit your needs. Your attorney should review your circumstances yearly to ensure that family circumstances (or a newly enacted, retroactive law) do not warrant a planning change. Ascertain your cash-flow needs Because you are irrevocably losing the right to your trust assets, make sure that your present cash needs will be met through the use of assets not deposited into the trust. It's impossible to predict for sure when or if you might require the services of a nursing home, so it is important to retain enough assets to cover normal living expenses in the meantime. Also, because a transfer of assets into trust within the look-back period will create a period of ineligibility before you can obtain Medicaid assistance, you must retain sufficient funds to pay for your nursing home bills if your health takes a sudden and unexpected turn for the worse during the period of ineligibility. Tax considerations Income tax Irrevocable trusts are taxed as separate entities on any income not distributed to beneficiaries during the year. All income, gain, loss, deductions, and credits apply to the trust (and not to the person who created the trust). Estate tax Because you retained no beneficial interest, any assets you transfer to the irrevocable trust are no longer part of your taxable estate; there will be no federal estate tax ramifications. (See gift tax, below, however.) Gift tax With the creation of an irrevocable trust (in which the creator of the trust is not a beneficiary), you are making a gift of everything you transfer to the trust. You may not have to pay federal gift tax, however, because of the applicable exclusion amount, which effectively exempts a certain amount of transfers during your lifetime from federal gift taxation ($5,340,000 in 2014). If your gifts exceed the applicable exclusion amount, irrevocable trusts can still allow you to avoid any gift tax Page 4 of 6, see disclaimer on final page

5 consideration. Federal gift tax rules provide that if you retain the right to determine who will receive your property at some later date, you have not made a completed gift of the property at the time of the transfer to the trust. Therefore, you can include a special testamentary power of appointment provision in your trust to eliminate any gift tax issues. However, this action may result in the value of the trust being included in your estate for estate tax purposes. Questions & Answers If you transfer assets to an irrevocable trust and name your two children as beneficiaries, when will you be eligible to collect Medicaid benefits? It depends on whether the transfer occurred during the look-back period or not. If the transfer occurred outside of the look-back period, you would qualify for Medicaid immediately (assuming all of the other eligibility requirements were met). If the transfer occurred during the look-back period, however, your eligibility for benefits might be delayed. Example(s): Assume that Ralph funded an irrevocable trust with one asset--his $288,000 vacation home. He named his son and daughter as the beneficiaries. Two years later, Ralph entered a nursing home. The average estimated cost of nursing home care in his state is $6,000. Because Ralph transferred assets to a trust during the look-back period (60 months), he will be ineligible to receive Medicaid benefits until 48 months have elapsed ($288,000 divided by $6,000 equals 48 months). Suppose you set up an irrevocable trust in which you name your daughter as the income beneficiary during your lifetime and all of your children as remainder beneficiaries after your death (i.e., the trust would dissolve at the time of your death and your children would split the trust principal jointly). What if a family crisis occurs sometime after you establish the irrevocable trust--is there any way to access principal if you need substantial cash? It is possible to build a "safety valve" of sorts into the terms of the trust. The trust could give the trustee (a third party) discretion to make occasional distributions of trust principal to your daughter, for instance. The trust could conceivably be dissolved (by the trustee's distribution the entire principal) if family circumstances warranted it. It is important to note, however, that a trust established during the look-back period cannot be used as a personal bank; Medicaid will review deposits into an applicant's bank accounts and construe unusual deposits (gifts from your children) as proof that the irrevocable status of the trust was illusory. Page 5 of 6, see disclaimer on final page

6 Securities offered through First Allied Securities, Inc. A Registered Broker/Dealer Member FINRA/SIPC Advisory Services offered through First Allied Advisory Services, Inc. A Registered Investment Adviser Vertex Wealth Management, LLC Michael J. Aluotto, CRPC President Private Wealth Manager 1325 Franklin Ave., Ste. 335 Garden City, NY mjaluotto@1stallied.com Page 6 of 6 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014