Medicaid Asset Protection Trust Asset Allocation

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
LeoB
Posts: 8
Joined: Mon Feb 17, 2020 10:42 pm

Medicaid Asset Protection Trust Asset Allocation

Post by LeoB »

In the near future, I am going to become the trustee for a family member, who would like to establish and fund a Medicaid Asset Protection Trust. In laymen's terms, it is my understanding that this irrevocable trust protects my family member's assets, in case they anticipate large medical expenses (e.g. home care, nursing home) and would like to qualify for Medicaid.

In speaking with the lawyer who is creating the trust document, I've been told that only dividends and interest should be distributed to my family member (the grantor). Additionally, principal cannot be distributed in most cases, since the trust's asset protection would then be in danger.

The grantor and beneficiaries have told me that they would like the trust to both provide sufficient income for the grantor's living expenses and to grow the trust's assets for the beneficiaries. I am posting to ask for input on possible asset allocations for the stocks, bonds, and cash in the trust.

Current retirement assets
Currently, all liquid assets are either in cash or can be sold with minimal capital gains. This total is about $2 million. This plus the grantor's house would be placed in the trust.
The grantor receives social security of about $20,000 a year.
Combined with the grantor's social security, a distribution of about 2% after tax would be enough to cover the grantor's current annual living expenses.
The grantor receives no pension or other income.

Tax Filing Status: Single

Effective Tax Rate: 8.5% Federal, 7.5% State & Local (unsure of exact rate, as it may vary depending on asset allocation and qualified dividends). I believe that income distributed to the grantor would be taxed at their individual tax rate and not the trust's.

State of Residence: NY

Age: 65

Proposed Asset Allocation 1:
15% Vanguard Short-Term Treasury ETF (VGSH) - yield 0.05%
56% Vanguard High Dividend Yield ETF (VYM) - yield 3.17%
29% Vanguard Dividend Appreciation ETF (VIG) - yield 1.61%

Proposed Asset Allocation 2:
15% Vanguard Short-Term Treasury ETF (VGSH) - yield 0.05%
15% Vanguard Total Corporate Bond ETF (VTC) - yield 2.84%
46% Vanguard High Dividend Yield ETF (VYM) - yield 3.17%
24% Vanguard Total Stock Market ETF (VTI) - yield 1.38%

Questions:
As stated earlier, trust principal cannot be distributed. Thus, I've proposed asset allocations that include dividend equity or corporate bond ETFs to hopefully provide sustainable income. Ideally, none of these shares would be sold in the event of a market drawdown. I've also proposed 15% allocations to VGSH in case of emergency expenses. Finally, to satisfy the grantor's and beneficiaries' desire to grow the trust assets, I've proposed fairly stock heavy allocations.

Given the goals to generate income for the grantor's living expenses and to grow the trust's assets for the beneficiaries, do you think these asset allocations are appropriate? Do you have any suggestions? Thanks for your help.
Last edited by LeoB on Tue Jan 12, 2021 10:57 pm, edited 2 times in total.
JBTX
Posts: 7370
Joined: Wed Jul 26, 2017 12:46 pm

Re: Medicaid Asset Protection Trust Asset Allocation

Post by JBTX »

Hopefully one of the few attorneys will speak up.

Keep in mind trust tax rates are significantly higher.

https://www.thebalance.com/2015-income- ... ts-3504855

Annual ordinary income above approx $13,000 is taxed at 37%

https://www.thetaxadviser.com/newslette ... -tcja.html
Topic Author
LeoB
Posts: 8
Joined: Mon Feb 17, 2020 10:42 pm

Re: Medicaid Asset Protection Trust Asset Allocation

Post by LeoB »

Thanks for letting me know about the trust tax rates. In this case, I believe that trust income distributed to the grantor would be taxed at their individual tax rate and not the trust's. I just edited the original post to reflect this.
bhjjk19
Posts: 69
Joined: Thu Feb 23, 2017 2:47 pm
Location: Buffalo NY area

Re: Medicaid Asset Protection Trust Asset Allocation

Post by bhjjk19 »

I would suggest that you talk with the elder law attorney who drafted the Trust and get an absolutely clear understanding about the implications of making adjustments to generate additional income for the grantor.
Reason: The more income generated, the more income Medicaid is going to take on a monthly basis. I'm not sure this would be in the best interest of the principal beneficiaries of the trust.
Also, be sure you have the elder law attorney completely explains your duties as Trustee from a tax reporting perspective.
More specifically, its common that Trust tax reporting requires 1041 and K1 forms. The 1041 ties the Trust TIN/EIN to the Grantors TIN/SS#. The K1 provides the details that identifies the income received (e.g., 1099-DIV, 1099INT) from the Trust that must be reported as income on the grantors 1040 at tax time.
However, since the Trust is an Irrevocable (because of Medicaid requirements) Grantor Trust, the IRS 1041 Instructions states that K1's are NOT required and instead the only tax filing requirement would be the completion of the 1041 form and an "Attachment" that provides instructions for the grantor as to how to report the income form the Trust on their own 1040 tax return.
You may wish to have your elder law attorney confirm my statements above regarding tax reporting.
Post Reply