Medicaid Irrevocable Trust

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 What Is An Irrevocable Trust?

A trust is an estate planning instrument that avoids the probate process while simultaneously providing a benefit for a beneficiary or group of beneficiaries. Trusts allow the owner to transfer property, and management of that property, to someone else for the benefit of a third party. Trust laws may vary from state to state, but generally speaking, trusts are an efficient way to transfer assets in a manner that allows the owner to control and manage the transfer.

There are several different types of trusts, which are suited for different needs. An irrevocable trust cannot be terminated by the settlor (the property’s owner) once the trust has been established. Irrevocable trusts can be changed, modified, altered, or canceled entirely by the settlor.

All trusts are generally irrevocable unless the trust agreement specifies otherwise. As such, if a settlor wishes for a trust to be revocable, state law generally requires that they include the steps and requirements for revocation specifically in the trust document.

However, some states have determined that revocable trusts are the default. As such, specific language in the agreement may also create an irrevocable trust.

There are several advantages to utilizing an irrevocable trust, such as the simplicity associated with this type of trust. Trust termination is only at the direction of the trust’s beneficiary; as such, execution of the trust is subject to fewer disputes. As previously mentioned, irrevocable trusts are generally considered the standard trust form in most jurisdictions. Meaning there are fewer technical concerns associated with requirements under most state laws.

Another benefit of an irrevocable trust would be that they are initially customizable. Irrevocable trusts can sometimes include specific instructions, such as those dictating trust termination, which make it even less likely that disputes will arise over the trust’s termination conditions. In terms of tax consequences to consider, once the settlor transfers their property or assets to the trust, they are relieved of any tax liability associated with the property or asset.

However, there are some disadvantages to consider as well. An example of this would be inflexible terms. By design, irrevocable trusts are not subject to much flexibility; meaning, once terms have been set, those terms must be followed. As previously mentioned, this differs from revocable trusts in that the settlor can modify them later. Additionally, irrevocable trusts are relatively straightforward but often require an attorney’s assistance when drafted.

What Is A Medicaid Irrevocable Trust?

Medicaid is a federal and state program that assists with healthcare costs for eligible applicants with limited income. Medicaid covers long-term care costs in a nursing home, as many people who require long-term care cannot afford to pay for it. However, they may have income that is considered to be too high to qualify them for Medicaid. To become eligible, they may use a financial strategy known as a Medicaid “spend down,” in which the applicant spends some of their income to ensure their income is low enough for Medicaid eligibility.

This process generally leaves an applicant with little to no assets. A Medicaid Irrevocable Trust allows them to protect specific assets by placing them into an irrevocable trust. 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. They must also appoint a trustee for the trust, who will manage the assets that are placed in trust and can be anyone other than the grantor.

The grantor funds the trust with assets, and the trustee takes legal title to these assets from the grantor to place the assets in the trust. During the length of the trust, the trustee holds these assets on behalf of one or more beneficiaries who have equitable title to those assets. Beneficiaries are entitled to receive trust assets when the terms of the trust provide for distribution.

In a Medicaid Irrevocable Trust, the grantor cannot access the trust monies, and they cannot amend any trust provisions affecting assets once the trust is created. Additionally, the trustee is under no obligation to distribute any trust assets for the grantor, for any reason, even to pay for the grantor’s health care. Alternatively, the grantor can modify or terminate the trust in a Medicaid Revocable trust after it is created. Revocable means that a grantor may revoke the trust or change its terms.

Are There Different Types Of Medicaid Irrevocable Trusts?

There are several recognized Medicaid Irrevocable Trusts. The most common of these would be a bypass trust, sometimes referred to as a family trust. In this trust, the grantor and their spouse each place provisions in their wills stating that their personal assets are to be used to fund the trust. When the grantor dies, money in the trust is used as income for their surviving spouse and children.

Other types of Medicaid Irrevocable Trusts Include:

  • An Irrevocable Life Insurance Trust: 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 their death. What this means is that these assets are not subject to estate tax. As such, when the grantor dies, the life insurance beneficiaries will receive life insurance proceeds without being required to pay estate taxes on those proceeds;
  • A Qualified Person Residence Trust: The grantor transfers title of their home to the trustee, but reserves the right to live in the home rent-free for a specific number of years. The exact number of years will be specified in the trust document. At the end of the term, if the grantor is still alive, the house becomes an asset to the trust beneficiaries. Beneficiaries most commonly include the grantor’s children or other close relatives;
  • A Spendthrift Trust: A spendthrift trust contains provisions that prevent one or more beneficiaries from irresponsibly, wastefully, or rapidly spending their share of trust assets. One way in which a spendthrift trust can be set up by naming a specific trustee solely for the beneficiary who might irresponsibly spend the assets. The specific trustee ensures that specific grantor limitations on the right of the beneficiary to spend are adhered to; or
  • A Charitable Remainder Trust: Grantors may wish to donate assets to charity, which can be done through a charitable remainder trust. A charitable remainder trust directs distributions to at least one named charitable organization beneficiary, although multiple charitable organizations may be named. However, the trust must provide for distribution to at least one non-charitable income recipient to be considered valid.

Do I Need A Lawyer For Help With Medicaid Irrevocable Trusts?

If you wish to create a trust, especially a Medicaid Irrevocable Trust, you should contact an experienced trust lawyer in your area who can help you decide what is best for your circumstances.

Your attorney can help you understand the various advantages and disadvantages of many different types of trusts, and can help you understand your state’s specific estate planning laws. Additionally, an attorney near you will also be able to represent you in court, as needed, should any legal issues or disputes arise.

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