The Medicaid Intentionally Defective Grantor Trust (MIDGT) might give you the opportunity to have the proverbial cake and eat it too. Our clients have long used the Medicaid Asset Protection Trust in various forms to shelter some or all of their assets from the ever rising cost of long term nursing home care. The irrevocable trust option offers significant protections to the person making gifts to protect assets from nursing home spending. These protections make gifts to an irrevocable trust a much more powerful option than gifts outright to children. Read this related article which outlines some of the general benefits of the Medicaid Asset Protection Trust and compares the use of the irrevocable trust to outright gifting.
Clients are now considering a relatively new blend of a traditional estate planning tool, the Intentionally Defective Grantor Trust (IDGT) and the Medicaid Asset Protection Trust. The assets transferred to the MIDGT are still protected from nursing home spending after the necessary gifting Medicaid ineligibility period, however there is another potential perk. The person making the gift (Grantor) to the MIDGT has to pay the income tax on the earnings on the MIDGT assets. Yes, you read that correctly. The Grantor might actually want to pay the income tax rather than have the Trust pay the income tax.
By paying the income tax on the earnings of the Trust assets, the Grantor is actually allowing the Medicaid Asset Protection Trust to grow without being reduced by income taxes, they are also likely to pay income tax at a lower rate than would the Trust entity and are likely to be able to take advantage of many personal income tax deductions that the Trust would not be able to avail itself of. Medical care cost deductions are often available to individuals who enter into Elder Law planning. This are often significant and can be used to offset gains in the MIDGT. If the Trust had been made responsible for paying the income tax, the individual’s medical care costs could not have been used.
The MIDGT is not for every client looking to protect assets from nursing home spending. A Grantor has to be willing and able to both forego the right to the income paid from the Trust and simultaneously pay the income tax. This can be a complex yet beneficial option that should be discussed in depth with your Elder Law and accounting advisors. It is just one more of the powerful tools and options we have at our disposal when assisting with the plans to save assets from nursing home spending.
If you would like to review the MIDGT or other Medicaid Asset Protection Trust options, please contact Douglas L. Kaune at 610-933 8069 or dkaune@utbf.com.
Douglas L. Kaune, Esq.
Douglas has conveniently located offices in Phoenixville, Malvern and West Chester, PA. He is a Partner with the law Firm of Unruh, Turner, Burke and Frees, P.C. serving clients in Chester, Montgomery, Delaware, Philadelphia, Berks and Bucks counties.
