Asset Protection With a Medicaid Trust

We are often asked what the difference is between the revocable living trust (RLT) and the irrevocable Medicaid trust (IT). While there are many different types of IT's, the one we are concerned with here is the IT for Medicaid planning purposes.

In a RLT you, and your spouse if you have one, generally act as the trustees, or managers, of the trust. You can take anything out, or put anything in, at any time. However, if you can get it, a nursing home can get it.

Many people, however, due to age or infirmity, would like to plan ahead and protect their assets. As people get older, they generally have to confront the very real possibility of losing some or all of their assets to a nursing home and they begin to go about surveying their options to protect assets. Long-term care insurance, the first option, is too expensive for many people or they do not qualify medically. In such cases, there are still two other options. Transfer the assets outright to your children or set up an IT. People who are aware of all the pros and cons regarding the two choices generally choose the IT for the following reasons. If you transfer the assets to your children, you just never know what might happen -- if they get sued, divorced, have a bankruptcy or, heaven forbid, die before you, you can lose everything. Not to mention they might just spend it or refuse to give it back to you later when you need it.

With the IT you are protecting the assets because whatever amount you put into an IT is not available for your care -- so you can protect as much or as little as you like by planning ahead. With the children named as trustees, they are only the managers, not the owners (the trust is the owner) so they cannot spend it and their creditors or ex-spouses cannot get it. They can only do what the trust allows them to do, which is to pay you the income.

The way that the IT protects your assets from a nursing home is by setting up two major roadblocks that they simply cannot get through. First, you must appoint someone besides you or your spouse as trustee. People generally appoint one or more of their adult children although it can be any trusted friend, relative or advisor. However, since you retain the right to change the trustee at any time, you are not really giving up control -- if you have a falling out or don't like the way the trustee is handling your assets, you can simply send them a notice advising them that they are being replaced as trustee.

Secondly, you must limit yourself in the IT to the income only. That is why these trusts are sometimes called income only trusts. This means that, if you put in a C.D., you only get the interest; a stock, only the dividends; or your house, the exclusive right to live there for your lifetime, unless it is a rental, in which case you get the rents. Like the RLT, the assets in the irrevocable trust pass to your beneficiaries on your death, free of the expense and delay of probate.

Even though you cannot take principal out of the trust (after all, if you could get it, the nursing home could get it) that doesn't mean assets cannot be sold. Let's say you want to sell your house in New York and buy a condo in Florida. You would direct your trustees to do just that and the trustees would then sell the house in New York and buy the condo in Florida in the name of the trust for your benefit, so it is still protected. Similarly, they can sell a C.D. and buy a mutual fund or sell one stock and buy another.

Finally, there are two ways to get principal, as opposed to income, out of an IT if you absolutely must. One way is that, while you cannot take principal out for yourself, you are allowed to make gifts to other persons (usually children, not a spouse) and they are free to spend it on you if they wish. The other way is to revoke the IT. Although it seems odd, in New York you can revoke an irrevocable trust if all the people named in the trust (generally parents and children) agree in writing that they wish to do so (since, in this case, there is no interested party). It's almost like having your cake and eating it too! You can protect your assets if you need to, but get them out of your trust if you need that as well.

We hope that this gives you some of the flavor of the differences between the RLT and the IT. But which one should you choose? With the assistance of one of our experienced elder law attorneys, we can help you decide which is best for you and your family based on your age, your health and your assets.

THE INFORMATION PROVIDED ABOVE IS GENERAL IN NATURE AND IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY. PLEASE DO NOT ATTEMPT TO USE THIS INFORMATION IN PLANNING YOUR OWN ESTATE, SINCE EACH CASE IS UNIQUE AND REQUIRES SPECIFIC PROFESSIONAL ANALYSIS AND ADVICE BY A QUALIFIED ELDER LAW ATTORNEY IN ORDER TO BE PLANNED CORRECTLY. HOWEVER, ONE GENERAL RULE ALWAYS APPLIES, THE SOONER YOU BEGIN YOUR PLANNING, THE BETTER YOUR RESULTS ARE LIKELY TO BE.