Should We Transfer Our Property to an Irrevocable Trust?
MassHealth planning trust
Question:
My husband and I live in Massachusetts. He is 75, and I am 73. We are in relatively good health, no pre-existing conditions. Our liquid assets are approximately $200,000. We own two condos in Massachusetts, free and clear. We live in one, and rent the other. The question is, how can we protect our assets if either one of us has to go into a care facility. We have been researching irrevocable trusts. Is that what you would recommend?
Response:
You don’t say whether you have children or anyone else you would like to pass an inheritance to. I will assume you do not and that you want to plan to protect the healthy spouse should one of you require care.
If that is the case, I would probably not recommend taking any steps to protect your assets. Should one of you require care, there are steps the healthy spouse can take at that time to protect so-called “excess” assets. The MassHealth (Massachusetts Medicaid) rules allow the healthy spouse to keep about $150,000 in savings plus the home, which is essentially all your assets other than the rental condo.
Fortunately, there’s an exception to the usual rule that excess assets must be spent down before either spouse may qualify for Medicaid coverage that should apply to the rental property. It is for business property “essential for self support,” which means that the healthy spouse should be able to keep it without any problem.
The one argument for transferring the rental condo to an irrevocable trust is that it would enable you to sell it and still protect the proceeds of its sale, which might not be protected otherwise. (I say “might” because a lot depends on the timing of the sale.) But I think this advantage is most likely outweighed by the drawbacks of a trust in your case. First, for the trust to work, it would have to say that neither of you could ever have access to the principal in the trust. You could still collect rents and if you sold the condo and invested the proceeds, you could receive the interest and dividends, but you could never dip into it for your needs. Second, there’s the administrative costs of the trust. You would have to set up a separate bank account for the rental income and to pay expenses, and you would need to obtain a tax identification number for the trust and file an annual 1041 return. If you are depreciating the condo, you may also lose this tax benefit. (Check with an accountant on this.)
The one step I would encourage you to take is to execute durable powers of attorney so that if one of you becomes incapacitated, the other has the ability to take whatever planning steps may become advisable at that time.
(Of course, all the above is based on my understanding that preserving an inheritance for someone else is not one of your goals. If it is, an irrevocable trust would make more sense, but you would have to understand the trade off — essentially more protection for your heirs, and less for you.)
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