Understanding what an irrevocable trust is

An irrevocable trust (in which the beneficiary is someone other than the creator of the trust) can be a tool through which an applicant can qualify for Medicaid benefits while simultaneously preserving assets for other family members or designated persons. Legally enforceable, the arrangement allows you to transfer property to a trustee who then holds the property for the beneficiaries that have been named. You can select anyone but yourself as beneficiary. The trustee must have no ability to direct income and assets to you. However, they would have the power to disburse trust income and/or assets to any of the named beneficiaries.

In order to qualify for Medicaid benefits, both your income and the value of your assets must fall below certain limits, which vary by state. If the assets are completely inaccessible to the applicant, they are not considered, however the irrevocable trust will preserve those assets for your family or other intended persons. The disbursement of those assets can take place either during your lifetime or after your death.

Your ability to start collecting benefits may be subject to a waiting period or period of ineligibility. This can happen if you transferred assets into an irrevocable trust during the 60-month look-back period.

How are irrevocable trusts used?

Irrevocable trusts are often used to preserve assets when you anticipate the need for future long-term nursing home care. Because of the 60-month look-back period which can delay your receipt of Medicaid benefits, timing of the transfer and when you may need benefits should be considered.

What are some of the advantages of irrevocable trusts?

Potentially be able to preserve assets for loved ones

We all know that nursing home care is expensive and can easily exhaust your assets. An irrevocable trust may provide a means of qualifying for Medicaid benefits while still preserving some assets for the benefit of your loved ones.

Avoids probate

Probate can be expensive, not to mention time-consuming. By placing all of your assets within a trust, probate may be avoided and your property can be disbursed in a more timely manner.

Takes the guess work out of where trust principal goes after your death

You can also specify what happens to trust principal at your death. When the trust is established, you decide the beneficiaries. They will be entitled to the income from the trust and the trust principal during your lifetime. You can also allow some beneficiaries to receive income only and others to receive the balance of the trust principal at the time of your death.

Eliminates considerations related to gift tax (in some cases)

To eliminate gift tax consideration with an irrevocable trust, people turn to the so-called special testamentary power of appointment. With a special testamentary power of appointment, you include a provision in the trust document that reserves the right for you to name in your will the people you want to receive the balance of the trust upon your death. According to federal gift tax regulations, if you reserve this right to determine who will receive your property at some later date, you have not made a completed gift of the property at the time that it is transferred into trust. 

Especially useful in income-cap states

Income-cap states set a threshold on the amount of monthly income you can receive if you wish to qualify for Medicaid. You are not allowed to spend down excess income on medical care. Because you are not entitled to any income from the assets you put into an irrevocable trust, you can eliminate these assets from your financial picture to help you qualify for Medicaid.

What are the tradeoffs?

The primary tradeoffs are loss of control over assets and the substantial waiting period. Because of those two factors, it’s best to keep some assets out of the trust so you can access them if needed.

Process for setting up an irrevocable trust

There are a few steps you should follow if you are interested in setting up an irrevocable trust.

  1. You’ll need to have a list of all your assets, including how title is held, the tax basis and how much you paid for the asset.
  2. Put together a list of all the income you receive from all sources.
  3. Indicate whether your resources are exempt, nonexempt or inaccessible.
  4. Prepare a list of all assets transferred within the last five years (whether they were a gift or put in a trust), being sure to note the date of transfer, transferee, purpose and consideration.
  5. Understand your cash-flow needs and the various tax considerations.

With Medicaid laws constantly changing, it would be wise to consult a Medicaid law attorney. We can connect you with an expert who can help address any questions you may have and draft the actual trust documents that are best suited for your individual situation.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Hauser Group Wealth Management and LPL do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.