A few weeks ago, I wrote a blog about irrevocable trusts. Typically, once you put an asset into an irrevocable trust, you no longer have control over that asset – you lose your ability to use that asset as you wish.
Why, you may ask, would I ever want to give up control of my own assets? I’ve worked my entire life to pay off the mortgage on my house and to build up my investments. Why would I give those up? In most cases in which we help clients create irrevocable trust, the answer to that question is, “So you can protect them in the event that you need long-term care.”
If your ability to care for yourself declines, and you find yourself considering a move to an assisted living facility or a skilled nursing facility, you’re going to have to figure out how to pay for that care. For most people, the cost of assisted living or skilled nursing care far exceeds their income, and in spite of a lifetime of careful saving and planning, their life savings will soon be depleted if they have to pay for that care by themselves. Fortunately, programs like Medicaid and the Aid & Attendance benefit through the Veterans Administration are available to help pay for those costs. Both of those programs are needs-based. In other words, to qualify for benefits, the applicant’s available resources (the money and assets available to them to pay for their care) must not exceed certain limits.
It is painful for many people to think that they will have to use up almost all of their life savings to pay for long term care. As they were making sacrifices over the years to build their savings, they did not envision paying all that money to a nursing home. Perhaps they envisioned using the money they were saving to travel with their spouse, or to help pay for their grandchildren’s education, or to leave an inheritance for their children. It’s difficult enough to accept the drastic life changes involved in a move to assisted living or a nursing home; it’s even worse to think that your life savings are going to be drained in the process.
An irrevocable trust can be a useful tool to help you preserve your savings while becoming eligible for Medicaid or VA benefits. If you place assets into a Medicaid-compliant or VA-compliant irrevocable trust, those assets should not count toward the resource limit in determining your eligibility for benefits. Here are the answers to some questions that many people ask about irrevocable trusts and benefit eligibility:
Why don’t those assets count? Basically, they don’t count because they don’t belong to you anymore. You no longer have the authority to spend the assets in your trust, so you can’t freely use them to pay for your care. Therefore, under Medicaid and VA rules, assets in a compliant irrevocable trust don’t count as resources that are available to you.
What happens to the money and assets I place in the trust? The flip answer is “whatever the trustee wants to happen.” Remember, once the assets are placed in the trust, the trustee controls how they are managed and how they are spent. Therefore, it is very important that your trustee is someone in whom you have unshakable confidence to protect that money and use it in a way you would want it to be used. It is also very important that the people you name as lifetime beneficiaries – the people who are eligible to receive distributions from the trust during your lifetime – are people you trust to take care of you if you need financial assistance. For most people, this means that the trustee will preserve the trust assets, and that the beneficiaries will only request distributions if they need them to help you out (e.g., to purchase items for you or to help you pay for care that is not covered by your insurance or other benefits).
Can I transfer assets into an irrevocable trust now in order to qualify for Medicaid or VA benefits immediately? Not without a penalty. Both Medicaid and VA rules have a “lookback period” – Medicaid’s lookback is five years prior to the application, and the VA lookback period is three years prior to the application (but only after October 18, 2018). If you have given money or assets away during that time, it is fairly likely that you will be assessed a penalty period – a number of months during which you will have to privately pay for your care – based on the value of the assets you transferred away. Therefore, it is important that you obtain legal counsel prior to making any such transfers if you are concerned about having to pay for long-term care in the next five years.
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Planning for long-term care can be a daunting process. The sooner you begin, the more tools you have available to you to preserve your assets from being depleted by the costs of that care. The attorneys at Severns & Howard can help you evaluate your needs and guide you in creating a plan that will give you peace of mind.