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Expect a complex interplay of rules for irrevocable trusts and Medicaid

by Legacy Plan
June 5, 2020

Irrevocable trusts grew in popularity as an effective way to protect your assets while also reducing your overall net worth to ensure you qualify for Medicaid. However, there are risks associated with transferring a majority of your assets to an irrevocable trust and many people have legitimate concerns about what will happen to their home and other assets if they move forward with a transfer to an irrevocable trust. This article will help address some of the most pressing questions concerning irrevocable trusts, qualifying for Medicaid and the complex interplay between the two.

More than 70% of Americans over the age of 65 are going to require some form of long-term care before the end of their lives. Furthermore, it is estimated that 40% of Americans who reach the age of 65 will need to spend at least some period of time in a nursing home facility, according to the U.S. Department of Health and Human Services.

Due to the ever-increasing demand for long-term care the out-of-pocket expense for a quality nursing home facility is astronomical and only expected to go up. For example, the Association for Long Term Care Planning reported that the average yearly cost for a private room in a nursing home facility is now more than $100,000. Yes, you read that correctly - $100,000. If you decide to go with a semi-private room, expect to pay more than $83,000 per year.

The overwhelming majority of Americans do not have the savings or financial resources to pay for a long-term care facility. You may be thinking, “Well, when I get Medicare, I'll be fine since the government will cover my nursing home care.” Not so. Many people are surprised to discover that Medicare does not cover the cost of nursing home care. However, Medicaid does provide coverage for long-term care expenses.

Here's the rub - to qualify for Medicaid, you need to be financially destitute. For example, to qualify for Medicaid's long-term care coverage, you can only have $2,000 or less in total countable assets and earn less than $2,349 per month in income.

What is considered a countable asset for medicaid?

Asset Countable for Purposes of Medicaid Eligibility
Your primary residence
Rental properties
Stock portfolio
Certificates of deposit
Checking and savings accounts
Vacation home
401 (k) retirement savings
Personal property such as jewelry, art, furniture, etc.
Life insurance policy with a cash value in excess of $2,500

It is important to understand that only certain types of assets are counted toward your Medicaid eligibility for long-term care coverage. Here is a general overview of the types of assets that are considered “countable” for the purposes of Medicaid (also please note that Medicaid is a state-run system so the specific rules and regulations may vary depending on where you reside):

  • Certain types of property
  • Checking and savings accounts
  • Certificates of deposit
  • Life insurance policy with cash value over $2,500
  • Stocks
  • Bonds
  • Automobiles

Spending down your assets and the Medicaid look-back period

When contemplating the staggering financial burden of paying out-of-pocket for long-term care, a strategy used by many people involved giving away assets or transferring assets to friends and family to the point where they met the threshold to qualify for Medicaid's long-term care coverage. Unfortunately, Medicaid administrators caught wind of this strategy and implemented a “look-back” period of five years. This look-back period means that if you transferred, gave away, or sold assets for less than fair market value in the five years leading up to your application for Medicaid's long-term care coverage, the government could continue to count those assets and make it extremely difficult for you to obtain long-term care coverage.

Converting countable assets to non-countable assets with an irrevocable trust

After the look-back period was instituted, people tried to figure out new ways to effectively manage their assets while still maintaining eligibility for Medicaid's long-term care coverage. This led to the utilization of irrevocable trusts as a way to convert countable assets to non-countable assets for the purposes of Medicaid eligibility.

An irrevocable trust is one in which you cannot touch any of the assets within the trust or amend the provisions of the trust. In addition, with an irrevocable trust, the trustee is not legally required to distribute any assets to you. Basically, if you transfer an asset into an irrevocable trust, the asset is truly owned by the trust, and not you.

Unfortunately, when you transfer an asset to an irrevocable trust, that transfer is viewed as a gift. As a result, it is subject to the Medicaid look-back period. This is why it is so important to be proactive and have a long-term care plan in place.

Consider creating a Medicaid trust

If you are interested in creating an irrevocable trust for the purposes of ensuring your eligibility for Medicaid's long-term care coverage down the road, you should consider a Medicaid trust. Why? Because the Administration on Aging, a division of the U.S. Department of Health and Human Services, stated that a Medicaid trust is generally exempt from many of the rules and regulations regarding trusts and Medicaid eligibility.

As mentioned earlier, to ensure Medicaid will not disallow any assets included in this trust, you need to be proactive and have your high-value assets transferred into the Medicaid trust at least five years prior to entering a nursing home or applying for Medicaid's long-term care coverage.

When properly created, an irrevocable Medicaid trust can help protect your assets from the serious risks associated with a Medicaid spend down.

Transferring your high-value assets to a Medicaid trust also helps ensure that your assets will be inherited by your loved ones (specifically the loved ones you want to inherent your assets).

Risks associated with irrevocable trusts

Despite the many advantages of a Medicaid irrevocable trust, there are risks you should be aware of before setting one up. The biggest risk is selecting the wrong trustee who turns around and completely ignores your wishes and preferences when it comes to the management of the assets in the trust. Remember, when you transfer an asset to an irrevocable trust, you are relinquishing ownership over that asset and transferring it to the trustee. If the trustee mismanages the assets in the trust, you have little recourse. It also exposes your assets to a liability risk. For example, let's say you named your son as trustee. Subsequently, your son gets behind the wheel of a car after consuming copious amounts of alcohol and causes a serious car accident where multiple people suffered catastrophic bodily injuries. In this scenario, your son could become the subject of multiple civil claims and if an adverse judgment is entered against them, the assets in the trust could be pursued to compensate the plaintiffs.

Take action to protect your assets and position yourself to be eligible to access Medicaid coverage for long-term care

Many people do not want to consider the prospect of having to use long-term care and spend time in a nursing home. However, the statistics clearly show that a vast majority of people (over 70 percent) will need some form of long-term care. As a result, you owe it to yourself and your loved ones to take the steps necessary to make sure your assets are legally protected while you maintain your eligibility to access Medicaid's long-term care coverage.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

Phone - 844.445.3422
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