Difference between irrevocable and a revocable trust

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, as a general rule of thumb, it is $2,000. If an applicant has countable assets over the limit (not all assets are counted for Medicaid eligibility purposes), they must “spend down” the “excess” assets to meet the limit. This is where irrevocable trusts are instrumental, 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 ones, 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.

Irrevocable MAPTs
MAPTs not only protect what otherwise would be countable assets from Medicaid’s asset limit, they also protect them from Medicaid’s Estate Recovery Program, preserving them as inheritance for loved ones. There are two ways in which MAPT’s might not be “safe” from Medicaid. First, MAPTs violate Medicaid’s Look-Back Rule. This is generally 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. See state-specific Look-Back Rules. If an applicant has violated the Look-Back Rule, they will be denied Medicaid eligibility and a Penalty 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 towards Medicaid’s income limit. This could potentially cause one to have “excess” income and be income-ineligible. If the Medicaid applicant is able to receive the principal, it is not a violation of the Look-Back Period, but it will count as assets towards Medicaid’s asset limit, likely 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.

Irrevocable Funeral Trusts
Irrevocable Funeral Trusts (IFTs), which do not violate Medicaid’s Look-Back Rule, allow a way for Medicaid applicants and their spouses to fund their funeral and burial costs in advance of their death. IFTs turn what otherwise would be countable assets into non-countable assets. In general, IFTs are always “safe” from Medicaid, given they are irrevocable. Some states, however, do require a Goods and Services Statement in order for the trust to be exempt. This is an itemized list of items / services and associated prices for which one is paying. The total must match the amount of the Irrevocable Funeral Trust.

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.