Can Irrevocable Trusts Protect Your Assets from Medicaid?

Nursing Home

“Help! My parent has been diagnosed with dementia and will need assisted living soon. My advisor told me that we need to set up an irrevocable trust so that Medicaid will pay for the nursing home costs.”

Hold up! Although you, your parents, and your advisor all want to help by preserving as many assets as possible, this advice reflects an outdated (or incomplete) understanding of the applicable law. Today, individuals with assets in excess of the allowable Medicaid limits have limited options when it comes to qualifying for Medicaid.

Before getting to the law, let’s talk about nursing homes, assisted living care, and Medicaid. Many older adults will need nursing home or assisted living care as their health begins to fail. The cost of such care can be staggering – it’s not unusual to see monthly costs in the range of $5,000 to $10,000 or more. Worse, such care is not typically covered by health insurance or by Medicare (the health insurance that most seniors receive when they start getting Social Security retirement).

This means that Medicaid – the state-run healthcare program for low-income individuals – is often the only source of funds that might be available to help cover nursing home and assisted living costs. But Medicaid is only available to people who have limited assets and income. Generally speaking, here in New Hampshire the Medicaid applicant must have less than $2,100 per month in regular income, and less than $2,500 in assets. Clearly, these figures are so low that qualifying for Medicaid can require “spending down” the person’s assets. Not ideal.

So, it’s not surprising that many people look to irrevocable trusts as a way to preserve assets and leave an inheritance for the Medicaid applicant’s descendants.

But here in NH, courts have frowned on individuals who lock up their houses (or other assets) in an irrevocable trust, and then ask their fellow taxpayers to pay for their nursing home costs via Medicaid. This issue came up in a 2016 NH Supreme Court case (Estate of Braiterman) in which the court held that the home in an irrevocable trust was still a countable asset for the Medicaid beneficiary. The court stated that if there are any circumstances in which the Medicaid applicant retains control or access to the trust assets – including the right to use and occupy real property – then the trust assets remain countable for Medicaid. As a result, the applicant was ineligible for Medicaid even though they had placed their house in an irrevocable trust.

At this point, you might be saying – why not just give away the assets to family members? This is where Medicaid’s “5-year look-back” applies. At the time the person applies for Medicaid, the program will inspect the applicant’s financial records for the preceding 5 years. If they find any “uncompensated transfers” (basically, gifts) then the person may be deemed ineligible or effectively penalized by Medicaid for a period of time. Whether the person gifts property or assets to another person, or whether they give it to a trust – the result is the same for Medicaid.

Although there are appropriate times to use irrevocable trusts, it’s important to note some of the downsides with these trusts. As we’ve explained above, they often don’t work to qualify an individual for Medicaid. Perhaps more worrying, though, are the strict limitations needed to create a valid irrevocable trust. Once property or assets are placed into an irrevocable trust, they can no longer be accessed by the person who set up the trust. This means that, if your parents put their house into an irrevocable trust, should they later need to derive cash from the property (via a home equity line of credit, by selling the home, etc), they won’t be able to. The entire proceeds must stay inside the irrevocable trust; they could not access those assets for their own financial needs or health needs that might not be covered by Medicaid. For an irrevocable trust to work, you must be willing to give up complete and ultimate control.

This means that your parents must have enough assets outside of the trust to live on for the rest of their lives. If they do not have substantial assets outside of the property, this may not be the best option.

Using irrevocable trusts in New Hampshire to qualify for Medicaid is especially difficult. For an irrevocable trust to potentially work and to qualify for Medicaid, all expenses related to the home (snowplowing, lawn care, property taxes, insurance, utilities, the new roof, the upgraded kitchen) must be paid by the Trustee out of the Trust checking account, and not by the Medicaid applicant. We would even go so far as to recommend having your parents pay “rent” to the trustee while they continue to reside in the home.

Using an irrevocable trust to qualify for Medicaid is heavily scrutinized, and many times the applicant is denied if he or she has such a trust. So, if your goal is to protect the house in order to qualify for Medicaid, this really is a moving target and may not work.

But all is not lost – there may be other options and means of qualifying for Medicaid using different strategies. Schedule a consultation with us and see how we can help!