Using Irrevocable Trusts in Medicaid Planning

by Matthew Karr, Esq. on August 4, 2011

Despite the fact that the vast majority of Massachusetts seniors will face certain impoverishment should they require long-term care, MassHealth (Medicaid in Massachusetts) only accepts seniors who can meet extremely strict income and asset guidelines. Without MassHealth benefits, a senior is forced to pay privately for their care at a whopping $10,000 per month until they have depleted their resources.

However, seniors and their families that plan ahead for long-term care needs are able to avoid this outcome using an irrevocable trust. Seniors, their loved ones, and future generations can all benefit from this effective and inexpensive estate planning tool.

The purpose of an irrevocable trust is to protect the assets of older citizens should they need long term care, allow them to qualify for state assistance without jeopardizing their home, and allow them to pass on an inheritance to their heirs.

Irrevocable trusts are especially attractive planning options for individuals who are over 65 years old, have less than $1 million in assets, and are concerned about needing long term care in the future. To be effective for MassHealth planning purposes, an irrevocable trust must be created and funded at least five years prior to needing long-term care. This is because MassHealth uses a five-year look-back period and will assess a disqualification period for any transfer to a trust within this timeframe.

MassHealth applicants are still able to keep $111,560 and a home per couple, or $2,000 per single person, outside of the trust while qualifying for benefits. Once assets have been transferred to the trust, the donor must not have direct access to trust principal so as to avoid a MassHealth lien. However, donors typically do keep access to income generated by the trust which they can use to help with their expenses. Since the donor has limited access to the trust principal, you want to make sure you are transferring assets you do not need regularly to live on.

An irrevocable trust can be set up using the donor as the trustee or another chosen party. Either way, however, the trust can be drafted so that the donor retains control by retaining the power to change the trustee and trust beneficiaries. This creates an ‘incomplete’ gift, which makes the trust property includible in the donor’s estate so that the trust beneficiaries will receive a full step up in basis on all appreciated assets (and most clients have highly appreciated real estate with very low basis). This also provides some flexibility to the irrevocable trust so that if your wishes change you can change your beneficiary designations by creating a new will.

According to the trust documents, payments of principal can be paid to issue (or any other beneficiaries) at the trustee’s discretion during the donor’s lifetime, offering an important gifting ability to the donor. This is also important because if the donor did need long-term care prior to the five year mark, the trust assets could still be distributed out of the trust.

Irrevocable trusts can also be used to protect real estate. If a home is transferred into the trust it will become protected from long-term care costs after the five year period. Other benefits of an irrevocable trust include avoiding Probate, providing protection from creditors of your children, allowing for staged distributions to young beneficiaries and offering a better option than outright gifting because your children or other beneficiaries will avoid capital gains tax issues.

If you or a loved one is interested in exploring the benefits available through the use of irrevocable trusts, call the Heritage Law Center for a free consultation.

Related posts:

  1. Using Trusts in Long-term Care Planning
  2. Avoiding the Nursing Home Using Pooled Trusts
  3. MassHealth (Medicaid) Permissible Real Estate Transfers
  4. Why MassHealth Planning is Crucial for Seniors
  5. The World’s Fastest-Growing Age Group

Previous post:

Next post: