Use of Irrevocable Trusts in Long-Term Care Planning

Nursing homes are expensive, however, it is possible to create an estate plan that will enhance eligibility for Medicaid to pay your nursing home costs. The primary document in such a plan is an Irrevocable Trust.

If you want Medicaid to pay your nursing home bills, you must apply. The application is essentially a declaration of assets – you must tell the Division of Social Services (“DSS”) everything that you own, that your spouse owns and that you and your spouse own together.  If DSS determines that your assets are too valuable, you will not qualify.

It is “legal” for you to give your assets to someone else so that, when you complete the Medicaid application, you will not have any assets to declare.  It is not advisable to simply transfer assets directly into the donees’ names; rather, you should utilize a well drafted irrevocable trust specifically designed for Medicaid eligibility purposes.  Some of the advantages of this type of trust are:  it protects your assets while you are living, both from your children’s creditors as well as your own;  you may be very specific as to how, and to whom, any trust any assets remaining at the time of your death shall be distributed; your designated trustee is required to act in a fiduciary capacity to protect your family’s interests; your assets will be protected from a donee’s spouse in the event of a divorce; you retain the ability to control the ultimate disposition of your assets by utilizing a testamentary limited power of appointment; and, use of a properly drafted irrevocable trust provides significant income and capital gains tax advantages versus simply transferring assets into the donees’ names.

In considering an irrevocable trust, you should remember that you must name someone other than yourself as the trustee.  The trustee will have the power to manage all trust assets.  For example, if you transfer your home to a trust and you later decide that you would like to sell your home, your trustee must sign the sale contract and all closing documents.  If your trustee does not agree that your home should be sold, he or she could refuse to sign the papers.  So, you should be confident that the person you name as trustee will act in accordance with your wishes.

Also, you should remember that, on a Medicaid application, you will be asked whether you have made any gifts or transfers, in trust or otherwise, within five years prior to submitting the application (the so-called “five-year look back rule”).  However, it remains a valuable tool to get the five-year clock “ticking” on transfers to protect your assets if you need a nursing home in the future.