How An Irrevocable Trust Is Used In Medicaid Planning

One way to divest yourself of assets for Medicaid Planning is to gift or transfer assets to an Irrevocable Medicaid Trust. The five year penalty period will apply to this gift/transfer.

1. Benefits of Irrevocable Medicaid Trusts

a. Use of the trust helps avoid probate because the trust rather than the older person's will directs where the property is to go. The trustee of the trust will manage the older person's assets, and the trust may be kept in place after the death of the grantor to help manage the assets for the spouse or children. Perhaps most importantly, the trust avoids the drawbacks of transfers of assets to children.

b. The trust can be left in place if the grantor dies, to withhold outright inheritance of the assets to the children.

c. The trust can protect nonexempt assets from depletion for payment of nursing home care.

d. The Medicaid Trust can hold any type of asset. Income can be distributable to the Medicaid applicant, his or her spouse, or the children. Principal can never be distributable to the applicant or his or her spouse. Principal distributions, if allowed at all, can be made only to the children.

2. Drawbacks to Irrevocable Medicaid Trusts

a. The main drawback is that, in order to be a Medicaid Trust, the trust must be irrevocable. The grantor loses control over and access to the principal. Irrevocability only upon incompetency or entry into the nursing home would cause the corpus to be an available asset.

b. If the applicant is incompetent, a trust cannot be established. The only option in this case is to use a Durable Power of Attorney previously signed to transfer assets out of the applicant's name.

c. The cost, the set-up fee and the management fee can be significant and must be considered when evaluating whether such a trust is appropriate for a client. The target client will probably have assets of $100,000 to $1,000,000 to be protected for Medicaid purposes.

d. The use of a trust may cause Medicaid to scrutinize all transfers more closely. For example, transfer of a residence into a trust with the elderly person retaining the right to live in the house may cause the Department of Job and Family Services the agency (who manages the Medicaid program) to argue that the person has retained an interest in the home sufficient to disqualify him from Medicaid benefits. To remedy this possible outcome, the transfer of a residence into a Medicaid Trust may be accompanied by a formal written lease with actual lease payments at fair rental value if the grantor or spouse remain in the home.

e. The Internal Revenue Code complicates the drafting of these Trusts. Although the Department of Job and Family Services does not apply tax law when evaluating transfers (to a Trust or otherwise), the tax laws do apply to these trusts for purposes of income, estate and gift taxes. The income, estate and gift tax ramifications must be carefully evaluated and discussed with the client.