One of the Irrevocable Trusts we prepare for clients who enter into
Nursing Home Asset Protection planning is referred to as the Medicaid Intentionally Defective Grantor Trust (MIDGT). One of the tax features of the MIDGT is that the person, usually an elderly parent, who transfers assets to the irrevocable trust will continue to be responsible for paying the income tax due on the trust earnings even though he or she has severed all other ties to the assets. One of the significant benefits of the parent, in this scenario, retaining the responsibility to pay the income tax is that he or she will be able to offset the income earned by the trust using possible long term care costs.
Below is a brief review of the Medical Care Costs that you or a loved one might incur and which might be used to offset income or gain.
It is important to maximize all income tax deductions available to you or a loved one. Medical expenses are deductible only to the extent they exceed 7.5% of a taxpayer’s adjusted gross income (AGI). You can only use medical expenses that are not reimbursed through insurance or other means. It is infrequently the case that the common medical expenses can be used as deductions because either the costs are covered by insurance or they do not rise to the necessary percentage of gross income.
That being said, the entire cost of a long-term care facility, including meals and lodging, can be a deductible medical expense. The care cost is fully deductible if the principal reason for entrance into the facility is the provision of medical care. The retained ability to take such a large deduction could result in significant income tax savings.
A person living in an assisted-care facility can only deduct a portion of the cost of the payment to the care facility. The IRS does not view the entire payment as a medical care cost considering the taxpayer is only being “assisted” and is not receiving complete care.
You can also take medical deductions if you are spending significant dollars to upgrade your home in order to remain at your residence comfortably. Equipment and home modifications to accommodate the handicapped (no age limit) that do not increase the market value of the home are deductible as a medical expense. Examples of such deductible improvements include additions of handicap accessible bathrooms or hospital beds.
So you can see, the income tax savings could be significant if the care recipient is claiming the income and offsetting it with care costs. This would potentially let the trust assets to grow income tax free for years.
As a side note, these medical deductions can even be taken at the estate level after a person’s death. When a person dies owing medical expenses, and those expenses are paid by the estate within one year, a medical expense deduction can be taken on the decedent’s final income tax return (Form 1040) or on the federal estate tax return (Form 706).
For a more detailed review of the Medicaid Intentionally Defective Grantor Trust click here.