Clients are often confused about the differences between irrevocable trusts and revocable living trusts, and the consequences they each have for medicaid planning. Those who advocate living trusts commonly lead people to believe that these trusts will protect one’s assets in the event long-term health care is needed. While living trusts serve the purpose of avoiding probate, they do not protect your assets. Quite simply, if your assets are readily available for your own use, which is the primary benefit of a revocable trust, then those assets are also considered available to pay for your health care needs. The only way to protect assets from long-term health care costs and creditors is to transfer assets to family members or to an irrevocable medicaid trust.
The obvious disadvantage of transferring assets is that you lose control. Transferring liquid assets, such as bank accounts and brokerage accounts, to an irrevocable medicaid trust is usually risky, even if you maintain the right to collect the income from the investments. Unless you are quite comfortable with surrendering control over the principal, such transfers are not generally advisable. Obtaining long-term health care insurance coverage to pay for the costs of home health and nursing home care, and thus preserve your assets, is the preferred course of action. If one is not able to obtain coverage, or cannot afford the cost, then creating an irrevocable medicaid trust may be the only option.
While transferring liquid assets to an irrevocable trust is usually not desirable, placing one’s home into such a trust can be quite beneficial. In most instances, one does not rely on one’s home as an income source with which to pay bills; therefore, transferring ownership to an irrevocable trust usually has no effect on one’s lifestyle. If properly drafted, an irrevocable medicaid trust can protect the home from long-term health care costs, while at the same time provide great flexibility. One can retain the right to reside in the home for the rest of his or her life, and also to direct that the home be sold and another be purchased in its place. The trust can also be designed to prevent capital gains tax problems and to preserve senior citizen and veterans tax exemptions. Lastly, in addition to protecting your home from long-term health care costs, by transferring it to a trust you avoid the dangers inherent in transfer-ring your home directly to your children. Since the home is owned by a trust, and not by them, you don’t need to worry if your child is sued or gets divorced while you are alive.
Of course, the sooner you transfer your residence to an irrevocable trust, the more likely it will be safeguarded for medicaid purposes. However, before taking such an important step, it is essential that you first obtain the advice of a knowledge- able professional.
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