Inter-Vivos QTIP Trusts; Almost Perfect

For many years I have been, and remain, a fan of the inter-vivos QTIP trust.  There is no perfect estate planning, but this QTIP is almost perfect.   BTW, this is a brief, technical post primarily for advisors and practitioners who might find this topic useful for their clients.

This inter-vivos QTIP trust is a marital trust for a married couple designed under the QTIP tax laws.  QTIP, in tax law jargon, is “qualified terminable interest property.”

Essentially, one spouse creates and funds this inter-vivos QTIP trust while alive. The other spouse is the beneficiary of the QTIP trust. “Inter-vivos” is an old legal term meaning essentially “between the living”.  A trust someone creates while alive.  By contrast, a trust that only becomes operative when the person dies is a “testamentary” trust. Such as a trust provision in that person’s Last Will and Testament.

As an important aside, and part of the inter-vivos QTIP design, it is possible for the funding spouse later to become a secondary beneficiary of the QTIP trust if the other beneficiary spouse dies first. Also, the written provisions of the inter-vivos QTIP trust can include provisions for the children after both spouses’ deaths, etc.

In broad terms, the above inter-vivos QTIP trust provides the following benefits:

    1. It gives a married couple – while they are still living — asset protection for the assets in the inter-vivos QTIP trust.
    2. The inter-vivos QTIP trust is defective for income tax purposes from inception up to the death of the second spouse. This both-spouses duration of the defective status means no trust income tax returns, no compressed trust tax rates, and no separate 3.8% Medicare tax during the remaining lifetimes of both spouses.
    3. I am purposely repeating this above point. That is, defective during the lifetime of the spouse who creates the QTIP trust and during the surviving spouse’s lifetime. This effect on both spouse generally is not available for testamentary QTIP trust planning.
    4. The defective income tax status of this QTIP trust also allows the substitution of assets, called a substitution power. This can allow, if needed, stepped-up basis planning by later substituting into the QTIP trust high-basis assets for low-basis assets, etc.
    5. The inter-vivos QTIP, in my opinion, provides the optimal flexibility for portability options.
    6. The spouse’s funding of the inter-vivos QTIP trust starts the 5-year lookback period for Medicaid nursing home eligibility. This may be important in the event later the spouses need governmental Medicaid nursing home assistance. Medicaid planning – although generally not at the top of most family’s estate planning checklist – can greatly help prevent financial impoverishment of the other spouse (and possibly the children).

For readers who wish to delve into more technical aspects of this inter-vivos QTIP planning, I highly recommend the following breaking-ground 2007 article by well-known estate lawyers Mitchell Gans, Jonathan Blattmachr, and Diana Zeydel.   Click here for the link. It is a well-written article.

Medicaid Nursing Home Planning. Who Needs it?

I ponder this nursing home question from time to time as I look around at my friends and family. My conclusion is a lot of families stand to lose financially (and unnecessarily) absent Medicaid planning.

The essential question starts with what demographic group needs to consider Medicaid nursing home planning? Is it only the poor who get (or should get) Medicaid benefits? Does anyone not in this poor group need even to think about Medicaid eligibility? As you read this blog post keep in mind the average monthly nursing home expense is in the $6,000 and up range in most states. Significantly more in certain areas, such as New York.

Here are five broad points to consider:

One is that preventive Medicaid planning significantly protects the continuing standard of living (e.g., economic) lifestyle of the non-nursing home spouse if the other spouse goes into a nursing home. This planning goes simply to getting the nursing home spouse in a position as soon as possible to receive government-paid Medicaid nursing home care, without depleting the family’s funds for the non-nursing home spouse (and any children who still are living at home, etc.)   The key point here is to have Medicaid planning already in place in the event of a head injury, stroke, accident, or other tragic event that might put one spouse into a nursing home much earlier than expected.

Two is that Medicaid has an extremely harsh 5-year rule essentially meaning Medicaid planning ideally needs to be in place at least 5 years prior to a need for nursing home care. The inter-vivos QTIP trust for a married couple, in my view, helps address this 5-year factor.  Below is how this 5-year rule applies.

Three.   Assume grandfather Bob makes a gift of $200,000 to his grandchildren to pay for their college. Two years later Bob falls and needs to enter a nursing home.

Assume Bob has few remaining assets, primarily as a result of this $200,000 college funding. Because Bob’s $200,000 transfer occurred within 5 years prior to Bob’s need to enter a nursing home, Bob is ineligible for nursing home Medicaid assistance for 26.6 months. This is the $200,000 divided by the average monthly Medicaid nursing home expense (assume $7,500 per month in this example; $200,000 divided by $7,500 = 26.6 months of ineligibility).

Also assume 4 years ago Bob funded an irrevocable gifting trust for his children and grandchildren with $1.5 million, in addition to the above $200,000 college funding.   His ineligibility in this second example is 226.6 months ($1,700,000 divided by $7,500 = 226.6 months of ineligibility).

By contrast, if Bob’s transfers had occurred simply one day outside the 5-year period, the transfers would not have been subject to the above Medicaid limitation.

Four, and this is important, all is not lost even if one fails to plan outside the above 5-year period. The available options, however, are limited, but still exist to help maintain the financial well-being of the other non-institutionalized spouse (and children). This means Medicaid should virtually be on everyone’s checklist, unless financial resources are substantial enough to remove all concern about a nursing home stay.

Five is that at a minimum families should consider Medicaid planning to keep the family home. Absent planning, the family home is protected from Medicaid / nursing home problems while at least one spouse remains living in the home. But, if a widow or widower vacates the family home in order to go into a nursing home, the home generally is subject to spend-down before Medicaid nursing home eligibility.  A transfer of the home within the above 5-year period will trigger the same ineligibility as in Bob’s case with his college funding and trust gift.

Medicaid Nursing Home Planning. What is the Market?

I ponder this question from time to time as I look around at my friends and family. That is, what is the market and what demographic group needs to consider Medicaid nursing home planning? Planning in terms of helping insulate a family’s assets from being spent down to pay for nursing home care before qualifying for need-based Medicaid paid nursing home assistance. Medicare does not pay for nursing home care except for a short, limited post-hospital recovery period.

The average nursing home expense varies by location. Assume Georgia is $6,000 month and that you will stay in a nursing home for 5 years. This will require $360,000. If both spouses end up with 5 year stays, this is $720,000.

For many high-end clients this cost is not material and self-funding is the most reasonable and likely course of action.

But here is an example more broadly regardless of whether you feel you will self-insure or not. What if I fall on the sidewalk, hit my head, and end up in a nursing home for 20 years? My wife and kids will spend down easily $1.5 million or more of our family assets to cover my nursing home care. But, there are ways this family exposure can be limited. One is an inter-vivos QTIP trust.

And, on the other hand, if nursing home care is the result only of old-age, what — for many families who might have a net worth under $5.0 million — should they do for Medicaid nursing home planning, if anything?

The significant hurdle for this under-$5.0 million crowd is the severe Medicaid 5-year look-back penalty rule (that I will cover in my next blog post). What this means is that ad hoc attempts to transfer away assets to kids, etc., if the transfer occurs within 5 years prior to applying for Medicaid nursing home assistance, will result in an ineligible Medicaid penalty period.

So, last minute giving away of assets is no solution. This “giving away” look-back covers virtually any manner of reducing your assets, including gifts, paying grandchildren’s tuition, etc.

Fortunately, there are Medicaid planning options that are effective in helping these families retain assets. And, for most people in this under-$5.0 million range, a minimum Medicaid planning goal, in my view, should be to try and save the family home from being sold and spent down for nursing home care.