Why an irrevocable trust can be superior to gifting

Wise use of an irrevocable trust can be a powerful way to protect assets as one gets older. One use is to avoid the need to spend down assets in order to qualify for certain benefits, such as veterans benefits and Medicaid.

But why use a trust? Why not just give the money away?

If a client is trying to protect assets and still qualify for government benefits, one strategy is to gift away excess funds to someone outside the household, typically children or other family members. The client then applies for veterans benefits, or in the case of Medicaid, waits five years before applying for benefits.

That strategy poses a number of significant risks. The person to whom it is gifted could die, become divorced, spend the money, invest the money in an unwise way, lose the money to creditors, and so on.

Even if the person making the gift were healthy when the gift was made, a health crisis could bring about the need for nursing facility care during the five years following the gift. If the gifted funds have been lost or spent, there could be no way to cure the gift. Without Medicaid benefits, there may be no way to pay for care.

An irrevocable trust has a number of advantages over an outright gift.


Simply having the funds in a trust provides a superior amount of control over an outright gift.

In addition, the person who creates and funds an irrevocable trust (called the “grantor”) can make a number of important decisions about how the funds are held, managed, and disbursed.  The grantor can name trustees, and decide whether to have a single trustee, followed by successor trustees, or co-trustees. The grantor can name beneficiaries and retain the right to change beneficiaries through a power of appointment in the grantor’s will.

A trust protector can be named, with the power to approve or disapprove distributions during the grantor’s lifetime. The grantor can decide whether there will be one trust or a number of trusts, and can stipulate what assets will be used to fund each trust.


The grantor can decide to receive income from the trust, even if there is no access to principal. Having income makes grantors feel as if the money is still theirs in some way, thereby easing some concerns about establishing an irrevocable trust in the first place.

Income can also help the client make it through a five-year look-back period by providing a means to help pay for care.

Protection from loss

By far one of the biggest concerns about gifting away funds is that the recipient (or “beneficiary”) will lose it in some way. With the right drafting, though, the funds placed into an irrevocable trust will not be available to be lost in a beneficiary’s divorce or bankruptcy proceeding.

Using a trust avoids the risk that a beneficiary will die and that the funds will be distributed to the beneficiary’s heirs.

Spendthrift language can help prevent the money from going to a beneficiary’s creditors, or from being squandered by a beneficiary who cannot handle money due to bad decision-making, gambling problems, addictions, or other reasons.

Tax advantages

An irrevocable trust offers some tax advantages over an outright gift, primarily in the area of capital gains tax. If the trust is structured as a grantor-type trust, then appreciated assets, such as a stock portfolio, can receive a favorable step-up in basis upon the death of the grantor. If such an asset were merely gifted, the recipient would have the same basis as the donor, and in many cases owe much more in capital gains tax.

Using a grantor-type trust provides a similar tax advantage for a homeowner’s principal residence. The estate can take advantage of the grantor’s capital gains tax exclusion under 26 U.S.C. § 121, which would not be available to heirs if the residence were gifted during the lifetime of the owner.

Weighing the options

Whether to create an irrevocable trust in any particular situation requires a careful assessment of the client’s objectives, assets, income, health and care needs, family dynamics, and other considerations. It can work well in the right circumstances, but it’s always best to consult with experienced legal counsel to make an informed decision.

Veterans benefits can provide more income for a Medicaid recipient’s spouse

Those familiar with veterans benefits for aid and attendance often think of them as a means to pay for care at home or in an assisted living facility.

But did you know A&A benefits can provide extra income for the spouse of someone on Medicaid (at least in Pennsylvania)?

Here’s an example. Suppose John, a wartime veteran with a dependent spouse (Mary), has been receiving the maximum benefit for aid and attendance: $1,949 a month. But John has just moved to a nursing home and qualified for Medicaid.

To understand the effect on John and Mary’s income, you need to know that when a veteran with a dependent spouse receives benefits to help with long term care, those benefits have two components:  (1) a low-income pension, and (2) housebound benefits or aid and attendance benefits.  Veterans benefits are not reduced when the recipient has a dependent (such as a spouse) and later qualifies for Medicaid. Under Pennsylvania’s Medicaid regulations, the “aid and attendance and housebound allowance portion of a veterans benefit” does “not count as income” when determining a Medicaid recipient’s income. 55 Pa. Code § 181.81(9).

In John’s case, his veterans benefit of $1,949 a month breaks down into a low-income pension of $1,290, and aid and attendance benefits of $659. He can continue to receive benefits because of Mary, his dependent spouse.

Because the $659 aid and attendance benefit does not count as income, he can give it to Mary each month because it does not count as his income for Medicaid purposes. Mary receives this additional $659 a month in addition to all other income she would be getting.

What’s more, if John and Mary are both low income, some of the pension amount ($1,290) could also go to Mary as part of a monthly maintenance needs allowance permitted under Medicaid provisions. Whatever Mary doesn’t receive from the pension will go to the nursing home to help pay for John’s cost of care.

When your spouse is on Medicaid, an extra $659 a month or more can make quite a difference in your quality of life.

Why did the teacher remove all desks from her classroom? What did the kids learn?

When the children arrived at Ms. Cothren’s class on the first day of school a few years back, they were surprised to see not a single desk in the entire classroom. (With permission from the superintendent, she had them removed.)

“Ms. Cothren, where are the desks?” the children asked.

“You can’t have a desk until you tell me how you earn it,” she answered.

Kids tried out various answers.

“Our behavior?” one suggested.

“No, it is not your behavior that earned you the right to sit at a desk,” Ms. Cothren said.

“Our grades?” another tried.


Throughout the day, the same scene repeated itself. Children puzzled over why they had no desks, but no one could answer Ms. Cothren’s question. Local news crews gathered, wondering what this crazy teacher was doing.

Finally, in the last period of the day, Ms. Cothren told her students that throughout the entire day, no one had really understood how they earned the desks that ordinarily sat in the classroom. “Now I’m going to tell you,” she said.

She opened the classroom door. In walked an armed forces veteran in full uniform carrying a desk. He set it down and stood against the wall. Another veteran carried in a second desk, set it down, and stood against the wall.

In all, 27 uniformed veterans filled up the classroom with 27 desks.

“You don’t have to earn these desks,” Ms. Cothren told the students. “These guys did it for you. They put them out there for you, but it’s up to you to sit here responsibly, to learn, to be good students and good citizens, because they paid a price for you to have that desk, and don’t ever forget it.”

A lesson for all of us on Memorial Day.

(Source:  Snopes.com)

VA benefits for healthy vet with ill spouse – a little known secret

It’s well known that veterans benefits for aid and attendance will help pay for long term care needed by a wartime veteran, or the widow or widower of one.

But what about Jane, who needs care in an assisted living facility and is married to Bill, a World War II veteran? Any help available there?

Quite possibly, yes!

It’s a little known fact that when a veteran is over the age of 65, the VA will presume a veteran is disabled for purposes of qualifying for a benefit known as the “low income pension.” If Bill qualifies for the full benefit amount – $1,291 a month – that extra will go a long way toward paying the cost of Jane’s care.

Bill should apply if: (1) he meets the usual requirements for low income pension benefits (modest household assets, other than dishonorable discharge, etc.), and (2) cost of care exceeds household income.

Even if household income is greater than the cost of care, but not by more than $1,291, it may still be worth their while to apply for partial benefits.