I am often asked: “I have a trust, so I am protected from long-term care costs, right?” The answer is dependent on a few things: the type of trust you have, when you established it, and the state you reside in. This article aims to provide an understanding on what does and does not work for protecting assets using trusts from a potential long-term care cost.
Revocable living trusts offer no protection from long-term care costs. This is true regardless of when the trust was created, and where the trust-makers reside. Revocable living trusts reserve certain rights for the trust maker; particularly, the right to full use of the assets held in trust (income and principal), and the right to revoke or amend the trust at any time, presuming the trust-maker has the requisite mental capacity. Revocable living trusts are great tools. Assuming the assets are properly funded (transferred to trust), they work to avoid probate at death, and usually make the administration process more efficient when compared to that of a last will and testament. Again, revocable living trusts provide no asset protection for the trust-makers, regardless of when it was established or where you live.
Irrevocable trusts may offer protection, depending on when it was created, what the terms of the trust allow, and what state you live in.
There are two important understandings to make clear at this point in the article:
First, irrevocable trusts are just that – irrevocable. Once you set them up, you can’t change them. This seems obvious, but it is important for the trust-makers to be comfortable with the control they are giving up with an irrevocable trust. For example, if you want to change how assets in the trust are distributed to the beneficiaries at a later point, you are not able to do so. It is irrevocable.
The second matter to understand in this regard are the rules of qualifying for state medical assistance, known as Medicaid. Medicaid is a needs-based benefit program administered separately by each state but funded in part by the federal government and in part by each state. In order to qualify for Medicaid, a person is allowed to have only a minimal amount of assets, depending on their circumstances (i.e. if they are single, or married). Additionally, the applicant must meet a 60-month (five years) waiting period with any gifted assets, known as the “look-back” period. If a person makes a gift of assets and then applies for Medicaid within five years of the date of the gift (the "look-back" period), the amount of the gifted assets will be taken into consideration in determining whether the person will be entitled to Medicaid benefits.
Trust-makers make gifts of assets to the irrevocable trust. This is where qualification for Medicaid depends on the date the trust was created, the state, and the type of irrevocable trust. Irrevocable trusts have two basic forms regarding continued income/asset enjoyment for the trust-makers. The trust-makers either create the trust whereby they continue to receive an income stream from the trust assets, or they do not receive an income stream/benefit from the trust assets. In other words, if the trust makers transfer title of land to an irrevocable trust, but they continue to get the cash rent as income each year, the trust makers are receiving an income stream/benefit from the trust assets. If the beneficiaries of the trust (i.e. trust-makers’ kids) receive the cash rent, this means the trust-makers gave up the income/asset benefits.
When trust-makers give the asset completely to the irrevocable trust, do not receive any income/benefit from the trust assets, and meet the five-year look-back period, then the assets placed in the irrevocable trust are protected and not counted towards Medicaid qualification. The beneficiaries of the trust receive all the income/benefit of the assets. Understand this means the trust-makers have made a full gift of the assets to the trust and get no benefit from the assets going forward.
If the trust-makers continue to receive income from the trust assets, then it depends on the state that you are in. Assuming the five-year look-back period has been met, North Dakota and Wisconsin allow for the trust-makers to continue receiving income and still have the assets protected and not counted towards Medicaid qualification. The income received by the trust-makers is available to Medicaid.
Minnesota is different (and stricter) if the trust-makers continue to receive income from the trust assets. The State’s rule says that any irrevocable trust or similar arrangement created on or after July 1, 2005, whereby the trust-makers continue to receive income from the transferred assets, the State can convert the irrevocable trust to a revocable trust, and thus make the assets transferred available assets for Medicaid qualification. See Minnesota State Statute 501C.1206.
For example, if the trust-makers (Minnesota residents) established an irrevocable trust in 2009 and transferred land to said trust while continuing to receive an income from the land held in the trust, then the land within the irrevocable trust is available. The State’s rule says the irrevocable trust can be made revocable for Medicaid qualification purposes. So, if the trust-makers applied for Medicaid in 2021, even though it was 12 years since the creation of the trust, there is no look-back period applied and the assets remain available because the trust-makers continued to receive the income of the trust assets.
Let’s continue with this example except change the facts so that the trust-makers do not receive any income from the land they transferred to the irrevocable trust in 2009. Trust-makers apply for Medicaid in 2021. Now, since they’ve made a complete gift of the assets in 2009, the five-year look-back clock started and was met in 2014. Accordingly, the assets in the irrevocable trust are not available or countable to the trust-makers when applying for Medicaid.
Let’s change the facts one more time. Assume the trust-makers made a complete gift of the asset and did not retain any income, but instead of trust-makers applying for Medicaid in 2021, they applied for it in 2012. This would be three years into the five-year look-back period. Thus, the look-back period was not met, and the assets in the trust are not protected.
Next time you hear “I have a trust, so I’m protected from long-term care costs”, be careful. As evidenced, this is a very complex and difficult type of planning. It is crucial for you to work with experienced professionals to help you navigate through these rules and assure that you have the plan you want and are aware of what you are giving up to get those protections. AgCountry has experts in the Succession and Retirement Planning Department that can help you with this. Talk to your local AgCountry branch for more information on connecting with a consultant in your area.