The cost of long-term care, even for a short while, can easily eat up an individual or couple's estate. An irrevocable Medicaid trust is a permanent agreement made by the trustor, or owner, that establishes control and management of her assets while she's still alive. The goal of forming an irrevocable Medicaid trust is to allow the trustor to keep her assets for her heirs while still qualifying for Medicaid insurance coverage for long-term medical care later. Medicaid, a state-administrated medical assistance program for low-income persons, has both income and financial resource limits for recipients.
A trust document is an agreement that contains all the terms and provisions, including asset management, when trust income payments will be made and the amounts and duration of the trust. The agreement also gives a person or institution -- the trustee -- authority to act on behalf of the trust. Trusts are funded by the assets and money of the trustor, such as his savings and his home, and the principal is the assets in the trust that produce income. A trust is either revocable, meaning it can be changed or ended by the trustor at anytime, or irrevocable, which is typically permanent and unalterable. Medicaid trusts must be irrevocable because the program's rules recognize any assets in a revocable trust as financial resources, jeopardizing the trustor's eligibility for assistance.
If a person has resources over the Medicaid limit, she must "spend down," or use up, the assets she owns over the Medicaid limit, before he can qualify for Medicaid coverage. Once her assets are depleted below Medicaid's resource limits, she'll receive insurance coverage for her long-term medical costs. One way to get around spending down is to put the assets in an irrevocable Medicaid trust. As long as the trust is set up correctly, those assets will not be accounted for Medicaid eligibility and can be retained to pass on to heirs. In order to qualify, neither the person applying for Medicaid nor her spouse can act as trustee or have access to the trust principal. However, she can receive the trust principal, if she chooses, or leave it to accumulate for her beneficiaries, typically her legal heirs. Once the trustor dies, the trust's principal passes to the heirs she named in the trust agreement. If the trustor or her spouse end up needing nursing home care, any irrevocable trust income she is receiving at the time must be applied to the cost of the nursing home under Medicaid rules.
To guard against misuse, Congress imposed a look-back period for asset transfers. If the trustor transferred her property to an irrevocable trust less than five years before applying for Medicaid coverage, she might be denied coverage because of the transfer. Medicaid imposes penalties for transfers made for less than the market value of the asset during the look-back period. The penalty length, in months, is the market value of the transferred assets divided by the typical monthly cost of private long-term care in the applicant's state. The result is the number of months the applicant is barred from receiving Medicaid coverage.
Medicaid is a joint federal-state program. While there are some federal guidelines, states have some of their own qualification guidelines, so it is important to check the laws in your state and to consult a qualified attorney when setting up the trust. Also, in some states not all facilities are required to accept Medicaid payments. This means you may be limited in your choice of facilities.