How Does a Living Trust Avoid Nursing Home Costs?

By Cindy DeRuyter, J.D.

How Does a Living Trust Avoid Nursing Home Costs?

By Cindy DeRuyter, J.D.

If you want to protect your assets from being spent to pay for your long-term care or for your spouse's care, you might wonder whether creating a living trust will shield your assets. Unfortunately, living trusts, also called revocable trusts or revocable living trusts, do not protect assets if you need long-term care. Regardless of when you create your living trust in relation to when you need care, assets inside revocable living trusts are generally treated as "available" assets for Medicaid purposes. If you want to review planning opportunities for potential future nursing home or other long-term care costs, you should consult with an elder law attorney licensed in your state.

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Understanding Revocable Living Trusts

A person creating a living trust and putting assets into it is the trust "grantor," and the person or company managing trust assets is the "trustee." Typically, the person creating the living trust serves as the initial trustee.

However, even if you structure a living trust so someone else is the trustee, you still retain reversionary rights to assets inside the trust. You also retain the right to amend or revoke the trust agreement. Because of this, trust grantors are deemed to have access to funds inside living trusts.

While assets inside revocable living trusts do not avoid nursing home expenses, they are popular estate planning tools for other reasons. When properly structured and funded, assets inside a revocable living trust avoid the expense and hassle of probate court administration when you die. This type of trust allows you to provide for long-term or ongoing management of assets for minors or financially-irresponsible beneficiaries. Revocable trusts can also provide a named successor trustee with seamless access to assets during lifetime periods of incapacity and when you die.

Irrevocable Trust Considerations

As is also true for living trusts, assets inside irrevocable trusts avoid probate court. The named trustee can manage and distribute trust assets over a period of years, according to the terms of the trust. While the trust grantor has reversionary rights in revocable living trusts, that's not the case in a properly-structured irrevocable trust.

Irrevocable trusts are separate legal entities with their own tax ID numbers and tax filing obligations. Assets transferred to an irrevocable trust must be managed and distributed as provided in the trust agreement. Once transferred, the grantor cannot recover the assets or direct the trustee on trust management.

In some states, you may be able to use irrevocable trusts as part of a Medicaid-planning strategy to protect assets from future nursing home expenses. However, the way states interpret Medicaid eligibility rules varies. An elder law attorney in your state can advise you on whether an irrevocable trust may make sense as part of your planning strategy.

60 Month Lookback Period

Medicaid qualification rules govern the amount of assets and income you can retain; there are state-specific differences in what states considered "available" and "exempt."

In general, if you apply for Medicaid to help pay your long-term care costs, you must "spend down" your assets and income by paying for your own care until you reach the levels specified in your state's laws.

Sometimes, seniors assume they can give away assets in the months or years leading up to a nursing home stay to protect those assets for future generations. However, Medicaid laws come with a "lookback" period. As of August 2018, the lookback period is 60 months from the month you apply for Medicaid. This means that when you apply for care, the state will look back at the most recent five years of your finances. If you gave assets away or transferred them to someone else for less than fair market value during that period, you will be ineligible for Medicaid for a period of months or years, determined by the value of the asset(s) you gave away or inappropriately transferred.

Medicaid planning is a complicated area of the law. Talk to an attorney to learn more about your potential options. If you want to create a living trust or an irrevocable trust for estate planning purposes, an estate planning attorney or a reputable online legal services provider can help you.

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.