Medicaid covers the costs of long-term care in a nursing home. Many individuals who require long-term care cannot afford to pay for it. However, these individuals, in many instances, have income that is too high to qualify them for Medicaid. How do they become Medicaid-eligible, then? Individuals use a financial strategy known as a Medicaid “spend down.” Through a “spend down,” an individual spends down some of their income to ensure their income is low enough for Medicaid eligibility.
A Medicaid spend down is a financial strategy used when an individual’s income is too high to qualify for Medicaid. Often, the spend-down process leaves an individual with little to no assets left. A Medicaid Irrevocable Trust allows individuals to protect specific assets by placing them into an irrevocable trust.
How is a Medicaid Irrevocable Trust Set Up?
To ensure that assets in a Medicaid Irrevocable Trust are protected from Medicaid, the grantor must create the trust no less than five years ahead of the actual need for long-term care. An individual must also appoint a trustee for the trust. The trustee’s job is to manage the assets that the individual places in the trust.
A Medicaid Irrevocable Trust trustee may be anyone other than the grantor. The grantor funds the trust with assets. The trustee takes legal title to these assets from the grantor. The trustee then places the assets in the trust. During the length of the trust, the trustee holds these assets on behalf of one or more beneficiaries. Beneficiaries have equitable title to those assets. Beneficiaries are entitled to receive trust assets when the terms of the trust provide for distribution.
What Rights Does the Grantor Have in the Trust Assets?
In a Medicaid Irrevocable Trust, the grantor cannot access the trust monies. The grantor cannot amend any trust provisions affecting assets once the trust is created. In addition, the trustee is under no obligation to distribute any trust assets for the grantor. The trustee is under no obligation to transfer assets for any reason, even to pay for the grantor’s health care. In contrast, in a Medicaid Revocable trust, the trust can be modified or terminated by the grantor after it is created. “Revocable” means a grantor may revoke the trust, or change its terms.
Are there Special Types of Medicaid Irrevocable Trusts?
There are a number of recognized Medicaid Irrevocable Trusts. The most common of these is known as a bypass trust, sometimes referred to as a family trust. In this trust, the grantor and their spouse each place provisions in their wills directing that their personal assets be used to fund the trust. When the grantor dies, money in the trust is used as income for the surviving spouse and children.
Other types of Medicaid Irrevocable Trusts Include:
- An Irrevocable Life Insurance Trust: This trust is primarily used by grantors seeking to avoid taxation of life insurance assets. Life insurance assets that the grantor puts into the trust are excluded from the value of the grantor’s estate at death. This means these assets are not subject to estate tax. When the grantor dies, the life insurance beneficiaries will receive life insurance proceeds without having to pay estate taxes on them.
- A Qualified Person Residence Trust: In this type of trust, the grantor transfers title of their home to the trustee, but reserves the right to live in the home. The right the grantor reserves is the right to live in the home rent-free for a specific amount of years. The amount of years is specified in the trust. At the end of the term of years, if the grantor is still alive, the house becomes an asset of the trust beneficiaries. Beneficiaries typically include the grantor’s children or other relatives.
- A Spendthrift Trust: A spendthrift trust contains a provision or provisions preventing one or more beneficiaries from irresponsibly, wastefully, or rapidly spending their share of trust assets. One way a spendthrift trust can be set up is by naming a specific trustee just for the beneficiary who might irresponsibly spend the assets. The specific trustee ensures specific grantor limitations on the right of the beneficiary to spend are followed.
- A Charitable Remainder Trust: Grantors often wish to donate assets to charity. A charitable remainder trust directs distributions to at least one named charitable organization beneficiary. The trust must provide for distribution to at least one non-charitable income recipient to be valid.
Do I Need the Help of a Lawyer to Create a Medicaid Irrevocable Trust?
If you are seeking to create a trust, you should contact an experienced estate lawyer who can help you decide what is best for your situation. An experienced estate lawyer near you can explain the benefits and drawbacks of various trust options you may have. The lawyer can work with you to create a trust that reflects your wishes. The lawyer can also represent you in court in the event of litigation over the trust.