What is the difference between an irrevocable and a revocable trust from Medicaid’s perspective? I have heard irrevocable trusts are safe from Medicaid, except there are ways an irrevocable trust could not be safe. Can you explain the difference and the ways an irrevocable trust could not be safe from Medicaid?
From a Medicaid perspective, an irrevocable trust is one that cannot be revoked or changed after its creation, while a revocable trust can be cancelled or altered. To avoid any confusion, a trust is a legal financial arrangement in which an individual, the “trustmaker” (also known as a settlor or grantor), names a “trustee” to manage the assets contained within the trust and lists a beneficiary who “benefits” from the trust agreement following the trustmaker’s death.
Relevant to the discussion of Medicaid and trusts, Medicaid has an asset limit for eligibility purposes. Although the asset limit varies based on the state in which one resides, as a general rule of thumb, it is $2,000. (To see state specific asset limits, click here). If an applicant has countable assets over the limit (not all assets are counted for Medicaid eligibility purposes), he / she must “spend down” the “excess” assets to meet Medicaid’s asset limit. This is where irrevocable trusts can come in handy, as assets contained within this type of trust are generally exempt from Medicaid’s asset limit, meaning they are not counted. Essentially, this arrangement turns countable assets into non-countable assets, as the assets are no longer considered to be owned by the Medicaid applicant. On the other hand, assets that are contained within a revocable trust are non-exempt, or stated differently, count towards Medicaid’s asset limit. This is because the Medicaid applicant is able to access the assets contained within this type of trust.
There are many different types of trusts and for the purpose of answering this question, we will discuss irrevocable Medicaid asset protection trusts (MAPTs) and irrevocable funeral trusts.
As mentioned previously, MAPTs protect what otherwise would be countable assets from Medicaid’s asset limit. Furthermore, they protect them from Medicaid’s estate recovery program and preserve them as inheritance for loved ones. With MAPTs, there are two ways in which they might not be “safe” from Medicaid. First, MAPTs violate Medicaid’s look back rule, a period of 60-months immediately preceding the date of one’s long term care Medicaid application in which Medicaid checks to see if any assets were sold or given away under fair market value. (California is more lenient with a 30-month look back period, and New York community Medicaid, the program through which long term home and community based services are offered, will begin phasing in a 30-month look back beginning in January of 2021. Currently, the program has no look back period.) If it is determined an applicant has violated the look back rule, he / she will be denied Medicaid eligibility and a penalty period (a period of Medicaid ineligibility) will be established. Therefore, it is vital that a MAPT be established well before it is thought the need for long term care Medicaid will arise.
Another way in which a MAPT might not be “safe” from Medicaid is if via the trust agreement there is a possibility the Medicaid applicant can receive income produced from the principal (the assets contained within the trust) and / or the principal itself. If income can be received, it will count as income towards Medicaid’s income limit (see income limits by state here) and could potentially cause one to have “excess” income and be income ineligible. If the Medicaid applicant is able to receive the principal, it will count as assets towards Medicaid’s asset limit, potentially causing one to have “excess” assets and be asset ineligible. To be clear, the Medicaid applicant does not have to actually be receiving income from the MAPT or take the principal for it to be counted as income and / or assets. https://www.medicaidplanningassistance.org/state-specific-medicaid-eligibility/
If a MAPT violates the Medicaid look back period and the Medicaid applicant has access to income from the principal and / or the principal, the look back period is disregarded. However, any income will count towards Medicaid’s income limit and the principal will count towards Medicaid’s asset limit.
Irrevocable Funeral Trusts
Irrevocable funeral trusts allow a way for Medicaid applicants to fund their funeral and burial costs in advance of their death while also turning what otherwise would be countable assets into non-countable assets. In general, irrevocable funeral trusts are always “safe” from Medicaid, given they are irrevocable. There are a handful of states that allow a Medicaid applicant, the “trustmaker,” to also be the trustee (the person who manages the trust), but this gives the individual a lot of control and it then becomes questionable as to if it is “safe” from Medicaid.
SEEK ASSISTANCE: The rules surrounding irrevocable trusts for Medicaid and Medicaid planning can be complicated, especially given that the rules are not consistent from state to state. If considering an irrevocable trust, it is highly suggested one contact a Medicaid planner. These professionals can offer guidance as to if an irrevocable trust is “safe” from Medicaid, and if it is, can ensure it is done correctly so as not to jeopardize one’s Medicaid eligibility. Find a Medicaid expert here.