Can I Pay Medical Expenses From an Irrevocable Trust?

By Jennifer Kiesewetter, J.D.

Can I Pay Medical Expenses From an Irrevocable Trust?

By Jennifer Kiesewetter, J.D.

Paying for medical expenses is one of the primary purposes of an irrevocable trust. An irrevocable trust allows a person, called a grantor, to establish a trust and place assets into it. A trustee oversees and manages the trust. The trust will identify the grantor's assets and designated beneficiary(ies) for each asset. Once the grantor finalizes the terms of the trust, he or she can't change the terms of the agreement, thus making it irrevocable.


Creating Trusts for Special Needs

Individuals who are totally and permanently disabled before the age of sixty-five can create an irrevocable trust for special needs to supplement the beneficiary's Medicaid benefits. Although this type of trust can't pay for medical bills directly, it can help improve the beneficiary's quality of life. For example, you can purchase updated mobility equipment for the beneficiary, i.e. adaptable wheelchair. However, the trust agreement must include a provision stating that all remaining assets in the trust shall be used to reimburse Medicaid before being distributed to any other beneficiaries.

Creating Trusts for Governmental Benefits

You can transfer assets into an irrevocable trust, preventing a beneficiary from losing eligibility for federal or state governmental benefits dependent upon income levels. These types of irrevocable trusts are often called “Miller Trusts," adjusting an individual's income downward and allowing that individual to remain eligible for certain governmental benefits. For example, the Miller Trust pays the beneficiary a modest monthly stipend to cover daily expenses, Medicare premiums, and other medical expenses not covered by Medicare or Medicaid. The trustee, an individual in charge of carrying out the terms of the trust, would then pay the beneficiary's medical bills from the trust's assets. Thereafter, Medicaid would cover any remaining medical expenses.

Paying Taxes on Irrevocable Trusts

You can transfer property and/or money into the irrevocable trust, but there are certain limits to be mindful of, as you may have to pay federal gift and estate taxes.

You can transfer up to the Internal Revenue Service gift tax annual exclusion amount ($15,000 for 2019) to as many people as you desire. This includes transfers into the trust. In addition to these transfers, you may make as many tax-free gifts throughout your lifetime, or upon your death, up to the gift and estate tax exemption amount. For 2019, this exemption amount is $11.4 million per person. Therefore, an individual can leave $11.4 million to his or her heirs without paying federal estate or gift taxes.

Taxes are paid on the property in the trust, but this amount is considerably lower than if the grantor kept those assets in a bank account. Further, if the grantor creates the trust to pay another person's healthcare expenses, these assets would be excluded from federal gift taxes. The trust can pay for any amount of medical costs, as long as the trust pays the expenses directly to the medical provider or institution.

Just remember that the terms of the trust are irrevocable regardless of how much you transfer into the trust's name. If you use the assets for prohibited purposes, the amount of the assets improperly used are included in your estate for federal and state tax purposes.

As you review anticipated medical expenses later in life, implementing an irrevocable trust may serve your interests. However, as you're engaged in your future planning, you may have questions about the best course of action. You should consult with an attorney or use an online service provider to assist you in answering any questions you may have regarding the establishment of an irrevocable trust to pay medical expenses. By receiving additional guidance, you'll understand your options for the payment of future medical expenses, giving you more confidence in your estate planning.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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