Assume for the moment that Alice Smith, a 77 year old retired school teacher, wants to make gifts in a trust for her two children so that they can pay for their children's college educations. Alice would like to gift a total of $100,000, with $33,000 being gifted immediately, and the same amount being gifted in 2010 and 2011. Even though Alice's retirement package includes a comprehensive long-term care insurance policy, Alice wants to make sure that Medicaid's five year look-back for all gifts will not cause her a problem in the future with any long-term care needs.
In light of the above, Alice's elder law attorney directed her to establish an irrevocable trust ("the trust"), wherein she retained no rights to principal or income. In order to encourage her two children to assume financial responsibility for their children's college educations, the trust stated that on Alice's death the commercial trustee would equally distribute the trust corpus to her children. The only trust power that Alice retained was the right to change the commercial trustee, to another commercial trustee, at any time.
At inception, Alice funded the trust with a $33,000 cash gift. Upon receipt, the trustee sent out the required Crummy Notices to Alice's two children. After the 30 day withdrawal right expired, the trustee applied for a flexible premium universal life Insurance policy ("the policy"), insuring Alice's life for an initial death benefit of $122,614. With the trust owning the policy, the trustee was required to submit seven annual premiums of $14,285, with the first premium being submitted with the policy application. The trustee completed a federal gift tax return for Alice in 2009, wherein the first $13,000 to each of her children was treated as a present interest exclusionary gift - not subject to federal gift tax. The remaining $7,000 in present interest gifts was subject to federal gift tax; however, the tax amount was offset by Alice's lifetime gift tax exclusion - resulting in no actual gift tax being paid to Alice.
Before the trust was established and funded, Alice understood that the $33,000 gift that she intends to make in 2011 will be subject to a Medicaid look-back that will end in 2016, and that her long-term care insurance, along with her other assets and income, were more than sufficient to take care of any long-term care needs that she may have, to a point well beyond 2016. Thus, Alice was of the opinion that the gifts, Crummy powers, and the trust were not going to hinder her ability to meet her long-term care needs, and if necessary, qualify for Medicaid benefits.
