Medicaid Planning Florida: Protect Assets with Irrevocable Trusts

Qualifying for Medicaid requires meeting strict income and asset limits. In Florida, applicants are generally limited to just $2,000 in countable assets, though certain items like a primary residence and vehicle are exempt.

Because of these limitations, many individuals assume they are not eligible for Medicaid. Fortunately, with proper planning, it is often possible to protect assets while still qualifying for benefits.

Understanding the Medicaid Five-Year Look-Back Period

When applying for Medicaid, the state reviews financial activity from the previous five years. This is known as the five-year look-back period.

If assets were gifted or transferred during this time to reduce net worth, penalties may apply. This makes strategic planning essential well before care is needed.

Using an Intentionally Defective Grantor Trust (IDGT) for Medicaid Planning

One effective strategy involves creating an Irrevocable Trust, specifically an Intentionally Defective Grantor Trust (IDGT).

While the term “irrevocable” may sound restrictive, these trusts can still allow the person creating them (the grantor) to retain certain controls—such as:

• Changing the trustee
• Modifying beneficiaries

These retained rights are what make the trust “defective” in the eyes of the IRS, allowing for favorable tax treatment.

Key Tax Advantage: Step-Up in Basis

A major benefit of using an IDGT is the ability to preserve the step-up in basis for assets.

Without a Trust (Direct Gift)

If assets are gifted directly to a child or family member:

• The recipient inherits the original purchase price (basis)
• This can lead to significant capital gains taxes later

With an IDGT

If assets are transferred into a properly structured trust:

• The beneficiary receives a step-up in basis at death
• This can significantly reduce or eliminate capital gains taxes

Example: Why This Strategy Matters

Let’s say Bob purchased stock for $20,000, and it later grows to $180,000.

If he gifts it directly to his daughter:

• She inherits the $20,000 basis
• She could owe taxes on $160,000 in gains

If instead the stock is placed in an IDGT:

• The asset is removed for Medicaid eligibility purposes
• Upon Bob’s passing, the daughter receives a stepped-up basis
• Taxes are minimized or avoided

This allows Bob to:

• Qualify for Medicaid after the look-back period
• Preserve more wealth for his family

What About IRAs and 401(k)s?

Retirement accounts raise another common concern.

Many people believe they must:

• Cash out their IRA or 401(k)
• Gift the proceeds

However, this can trigger:

• Income taxes
• Potential early withdrawal penalties

Instead, Medicaid allows a better approach:

• Take Required Minimum Distributions (RMDs) in monthly payments
• The account balance is not counted as an asset
• Only the monthly income is considered

This allows individuals to:

• Maintain Medicaid eligibility
• Keep retirement funds invested
• Preserve assets for beneficiaries

Why Proper Planning Matters

Medicaid and tax rules are complex, and mistakes can be costly. Strategic planning with an experienced elder law attorney can help ensure:

• Eligibility is achieved
• Assets are preserved
• Tax consequences are minimized

If you or a loved one are planning for long-term care, having the right strategy in place can make all the difference.

When you’re ready, our team is here to help you explore your options and create a plan that protects what matters most.

Written by Brooke Colbert, Attorney at Shalloway & Shalloway, P.A.

This article is for educational purposes only and does not constitute legal advice. Medicaid rules change and eligibility depends on individual circumstances.