Why an Irrevocable Trust is a Great Way to Save Money and Fund Long-Term Nursing Home Care

Byline: Chad Nelson, Esq.

Estimated read time: 3-4 mins

When long-term nursing home care is needed, a person generally has two options to cover the cost: 1). pay privately, using one’s own financial resources, or 2). apply for Medicaid once their resources become insufficient.

Medicaid coverage for long-term nursing home care is only available for those with no more than a few thousand dollars in “countable” resources. Thus, individuals usually must deplete the bulk of their savings and other assets before Medicaid will fund their nursing home care.

An irrevocable, Medicaid-asset protection trust can be an effective tool to limit one’s financial exposure to the high cost of long-term care. By creating such a trust well enough in advance of requiring long-term care, and funding it properly, individuals can preserve valuable assets ─ like real estate, investments, and bank accounts ─ and qualify for Medicaid much sooner.

How It Works

As you can imagine, there are several conditions that properly-structured irrevocable trusts  must meet in order to reap the benefits:

Condition #1: It Must Be Setup 5 Years Prior to Applying for Medicaid

For an irrevocable trust to protect the assets it holds, it must have been in place, owning the assets, for a continuous period of five years. Otherwise, it will run afoul of the “five-year lookback” period.

When a person applies for Medicaid due to insufficient financial resources, Medicaid inquires about any asset transfers by the applicant in the five years leading up to their application. Any such transfers, if fair market value was not received in return, will cause a person to be ineligible for Medicaid with few exceptions. The assumption is that if an applicant gave away assets in the years leading up to their Medicaid application, including transferring them into a trust, they did so with the intent to qualify for Medicaid.

Therefore, the appropriate time to create an irrevocable trust is while one is still healthy or can foresee needing long-term care in the not-too-near future for a chronic condition.

Once the trust is created, assets must be transferred into it, otherwise they will not receive its protection. For real estate, this necessitates a new deed, transferring ownership out of the current owner’s name and into the trust. For investment and bank accounts, it requires a change of ownership affected through the controlling financial institution, transferring the accounts to the trust. Funding the trust in a timely fashion after its creation is crucial, since the five-year clock mentioned above does not begin until the asset is owned by the trust.

Unlike more common revocable trusts, the creator of an irrevocable Medicaid asset protection trust cannot have the power to revoke or amend it. If the trust is not drafted properly, and its creator has retained any authority to “undo” the trust and regain individual ownership of its assets, Medicaid will consider the trust assets available resources for private nursing home payment.

The trust terms must leave no ambiguity for Medicaid to claim the person may access and liquidate trust assets to pay for their long-term care. Thankfully, there are creative ways to draft irrevocable trusts so that the creator of the trust is left with a modicum of flexibility should the need to change key trust provisions arise, such as its ultimate beneficiaries.

Once a properly-drafted irrevocable trust has been created and has “owned” its assets for a continuous period of five years, those assets are no longer considered “countable” resources available to pay the nursing home for long-term care. Thus, Medicaid eligibility becomes a much more realistic prospect depending on how much in remaining, countable assets an individual has in their possession (those assets not placed into the trust’s ownership).

It Pays to Plan Ahead

Incorporating a well-written, fully-funded, irrevocable Medicaid asset protection trust into your overall estate plan can result in enormous financial savings for you and your loved ones. The key is to assess your likelihood of needing long-term nursing home care and putting a plan into motion.

To learn more about irrevocable trusts, Medicaid asset-protection strategies, or determine whether you might benefit from a trust, contact our office for a complimentary estate planning consultation.

Frequently Asked Questions

Like all trusts, an irrevocable trust is a legal, fiduciary arrangement that moves financial assets from one person (the grantor) to another (one or more beneficiaries) as part of the preservation of and plan for the eventual distribution of an estate.

A key benefit of an irrevocable trust is that it reduces the value of the grantor’s estate that is considered countable by Medicaid, thereby protecting the transferred assets from having to be used for long-term nursing home care.

A trustee is responsible for administering trust assets in accordance with the trust terms. Often, the trustee is the grantor’s child or other family member and, in some cases, can even be the grantor themself.

As a general rule, irrevocable trusts cannot be revoked or amended without court intervention. However, there are ways for a grantor of an irrevocable trust to alter the trust’s terms upon their death.

Irrevocable trusts generally do not change the tax status of assets contained within them. For Medicaid purposes, however, they are often structured so that income generated by trust assets are paid to the beneficiaries, rather than the grantor, making such income taxable to the beneficiary.

For income tax purposes, trust assets are taxed to whomever receives trust income, which is spelled out in the trust terms. For estate tax purposes, trust assets are considered a part of the grantor’s taxable estate, meaning the beneficiaries of the trust receive a “step-up” in tax basis when the assets are inherited.

The trust usually ends at the death of the grantor, with remaining trust assets being distributed to its named beneficiaries. Sometimes, a beneficiary’s interest is withheld for various reasons, and the trust continues to operate for that individual’s benefit for a limited period.