Medicaid Myth #2 - I have a Revocable Trust, so my Assets are Protected from the State if I go into a Nursing Home

Trusts are commonly used estate planning tools.  There are two main types of Trusts – Revocable and Irrevocable. If you have a Trust, make sure you know the difference between them and the benefits your Trust will provide.

 Revocable:

A Revocable Trust is used to avoid probate and to protect certain types of beneficiaries, such as family members with special needs, spendthrifts, or minor children.  A Revocable Trust also maintains the privacy of the person creating the Trust, often referred to as the Grantor, Settlor or Trustor.  If you have created a Revocable Trust, then as Grantor you are able to maintain full control of the Trust and its assets during your life. 

 The Grantor alone holds the power to amend, restate or revoke the Trust as long as he is living.  Upon the death of the Grantor, the Trust becomes irrevocable.  The Grantor also occupies the role of beneficiary of the Trust during life and has full access to all income and principal generated by the Trust assets. A Revocable Trust is merely another way for an individual or couple to hold title to assets.   A Revocable Trust does not protect against creditors invading your trust to seek payment of a debt.

  Irrevocable:

While an Irrevocable Trust provides many of the same benefits as a Revocable Trust, the primary purpose of an Irrevocable Trust is to protect the Trust assets for the beneficiaries of the Trust upon the death of the Grantor.  Asset protection, Medicaid eligibility, estate tax avoidance, creditor and lawsuit protection are a few examples of the purposes for creating an Irrevocable Trust.  

 Depending on the Grantor’s purpose for creating the Irrevocable Trust, it may not be possible or desirable for a Grantor to serve as the Trustee of the Trust.  Additionally, an Irrevocable Trust cannot be amended, restated, or revoked by the Grantor. Oftentimes the only way to make changes to an Irrevocable Trust is through judicial reformation. 

 Generally, once the assets are re-titled into the name of the Irrevocable Trust, the Grantor no longer has access or control over the assets.  However, there are certain circumstances under which the Grantor can be an income beneficiary of the Trust during life.  While a Revocable Trust may be an appropriate estate planning tool for just about anyone, an Irrevocable Trust may not be right for everyone.   

 Beware:

A common misconception is that creating a Revocable Trust protects your assets from a nursing home provided the assets are funded to the Revocable Trust prior to the five-year lookback period for Medicaid.  Unfortunately, this is not the case.  A Revocable Trust does not protect your assets from the nursing home if you require long-term care in the future.  A comprehensive Revocable Trust may allow the Trustee to do governmental assistance planning for the Grantor, however, it does not protect assets from a nursing home.  In fact, assets transferred to a Revocable Trust are considered uncompensated transfers for Medicaid purposes and must be paid back, or Medicaid will assess a penalty period leaving you ineligible for Medicaid benefits for the length of the penalty period. 

 To protect assets from Medicaid under today’s laws, the Grantor must create an Irrevocable Trust, ensure his assets are titled in the name of the Irrevocable Trust, and then must wait for five years before applying for long term care Medicaid.  

 Depending on your situation, a comprehensive estate plan may include both a Revocable Trust, and an Irrevocable Trust.  If you or loved one, have a Trust, but you are not sure if it is Revocable or Irrevocable, or if you are interested in learning more about probate avoidance, asset protection with Irrevocable Trusts, or how to avoid a guardianship and/or conservatorship action,  please contact our team at Simpson Law Firm to schedule your planning session.  You may contact us by calling 803-764-9555 or by emailing us at melissa@hollysimpsonlawfirm.com.