For years, I have been using an irrevocable trust to protect a client’s home from the cost of long-term care. I successfully used such a trust to protect my parents’ home from the ravages of long-term care. My mother was a resident of a nursing home for six years; my father was a resident of a nursing home for two years. In today’s dollars, the cost of their care would have been $1,500,000. My parents never had $1,500,000. The only asset of value my parents ever had was their home, and by transferring their home to an irrevocable trust, I was able to save their home from long-term care costs and qualify my parents for Medicaid benefits.
To illustrate the trust planning technique, let’s assume a hypothetical set of facts. Mrs. Smith, aged seventy, is interested in protecting her home from long-term care costs. Mrs. Smith has four children. She wants to transfer her home to her children, but she worries that one of her children might be sued or divorced. She is concerned that a child’s creditor or ex-spouse may take her house from her.
If Mrs. Smith transfers her home directly to her children, her home would be exposed to her children’s future problems. For instance, if a child gets into a car accident and is sued, the child’s creditor could attach Mrs. Smith’s home because the child owns the home in his name. If the spouse of a child files for divorce, the soon-to-be ex-spouse might try and lay claim to the child’s share of Mrs. Smith’s home. If a child dies, the child’s share of the home will pass to the child’s spouse. Mrs. Smith would probably prefer that the child’s interest pass to the deceased child’s children—who are Mrs. Smith’s grandchildren—not the child’s spouse.
All of these issues can be avoided with a properly structured irrevocable Medicaid trust. Mrs. Smith transfers ownership of the home to the trust, starting the five-year lookback, and reserves life rights for herself in her home. She has the right to live in the home for the remainder of her life and she is responsible for paying all the carrying costs (e.g., real estate taxes) associated with the home. Her children have no obligation to pay any costs.
When the assets of the trust cannot under any circumstance be distributed to the Medicaid applicant—that is, Mrs. Smith—then the assets of the trust are unavailable to the Medicaid applicant. When Mrs. Smith transfers her house to a properly drafted Medicaid trust, the five-year lookback for asset transfers begins. If Mrs. Smith makes the transfer more than five years before applying for Medicaid benefits, then her house will be protected from her long-term are costs and Mrs. Smith will qualify for Medicaid benefits.
I have assisted hundreds of clients protect their homes—and other assets—from long-term care costs. This is the planning that I did for my parents who spent a combined eight years in nursing homes.
Here are some common questions clients ask me about these trusts:
Who serves as trustee of the trust? Typically, clients name their children as trustees of the trust. If Mrs. Smith has four children, I recommend that two of the children serve as a co-Trustees and the other two children serve as alternate trustees. When you have co-Trustees, both of the trustees must agree to make any distribution from the trust, so naming co-Trustees gives Mrs. Smith an extra sense of comfort since two of her children must agree to do anything with the trust.
What are the costs of running the trust? None. The only possible cost of maintaining a trust would be if your child, who is the trustee, charged a commission but you could say in the trust that the trustee serves without being entitled to a commission.
What if I want to sell the house? You can sell the house. Your child who is the trustee of the trust must join in the sale. All the money would go into the trust. The five-year look back does NOT start anew. The five years began with the initial transfer of the house to the trust and continues to run from that date. The trust could use some of the money to buy a new house and you could live in the new house. For instance, assume that Mrs. Smith transfers her house into a trust on January 1, 2020. On March 1, 2023, she sells her house. On April 1, 2023, her trust buys and new house, and Mrs. Smith lives in this house. By January 1, 2025, more than five years after Mrs. Smith initial transferred her house to the trust, the five-year lookback period has run. The fact that Mrs. Smith sold her house in 2023 does NOT affect the running of the five-year lookback period.
What does “irrevocable” mean? Irrevocable means that the terms of the trust cannot be modified, and that Mrs. Smith cannot revoke the trust; however, Mrs. Smith’s children are the trustees of the trust and the beneficiaries of the trust. Mrs. Smith’s children could distribute the assets of the trust out of the trust to themselves. Once the assets are in the children’s names, the children are free to do with the assets what they choose to do with the assets as the assets are their assets.
Does the trust have to be an irrevocable trust? The short answer is, yes. The trust has to be irrevocable, but as I mention above, the client’s children are the trustees and beneficiaries of the trust. While the terms of the trust cannot be changed and the trust cannot be modified—and while it has to be that way to protect the house from long-term care costs—the children are free to remove the assets from the trust if the trustees (typically two of the children) all agree to distribute the assets of the trust to the trust’s beneficiaries (all of Mrs. Smith’s children).
Am I entitled to the benefits of ownership such as the Anchor rebate or the tax freeze? Yes, because you are the life tenant and you remain responsible for paying the carrying costs associated with the property (e.g., real estate taxes), so you are entitled to these benefits of ownership.
Who pays the costs associated with the house? Mrs. Smith has life rights in the house. Mrs. Smith, not her children, are responsible for paying the costs associated with the house. The transfer of the house to the trust in no affects the children. The children do not pay taxes. The children have no economic impact from the house being in the trust.
How much is this going to cost me? The typical charge to draft an irrevocable trust, deed with life rights, Will, financial power of attorney, and advanced health care directive for a single client is $2,650 plus the costs of recording the deed with the county client (about $110), which my office handles. For a married couple, to draft all of these documents, I charge about $2,850 plus costs.
Is it worth it? It was for my parents. Let’s say your house is worth $400,000. Would you spend $2,650 to save $400,000? I would. My parents did. There are about 10 lawyers in the entire state whom I would trust to do this type of work, and I’m one of them. To my knowledge, I charge far less than the other 9. So, yes, I think it is worth it.