What Is an Irrevocable Medicaid Trust?

By Cindy DeRuyter, J.D.

What Is an Irrevocable Medicaid Trust?

By Cindy DeRuyter, J.D.

An irrevocable Medicaid trust is an advanced planning tool designed to help people qualify for Medicaid coverage while protecting personal assets for future generations or charitable beneficiaries.

Medicaid is a government-funded insurance program that provides a safety net to pay for long-term care expenses. To be eligible for coverage, a recipient must meet low asset and income thresholds. This means that people who have accumulated assets during their lifetimes must "spend down" those assets and income, paying for their own care until they qualify for Medicaid.

Old man writing on document in front of laptop

Paying for Long-Term Care

Nobody likes to think about the possibility that they may need long-term nursing home care in their senior years or that a parent, spouse, or other loved one may need such care. But, no matter how healthy someone is today, they may need costly, skilled care in the future. According to SeniorLiving.org, the average annual cost of a private room in a skilled nursing facility in the U.S. is more than $90,000, as of September 2018.

Some people who need care choose to fund their care on their own or purchase long-term care insurance. Others work with elder law attorneys specializing in Medicaid planning. In some cases, elder law attorneys recommend irrevocable Medicaid trusts as part of the planning process. The primary purpose of an irrevocable Medicaid trust is to protect and pass assets to named beneficiaries while allowing the person who created it, called the grantor, to qualify for Medicaid in the future.

Qualifying for Medicaid

When a senior who needs long-term care applies for Medicaid, they must document their assets and income. Allowable asset and income levels for Medicaid programs vary by state, so the first step in qualifying for Medicaid making sure you are in compliance with state-specific laws.

If an applicant has more assets than their state's laws allow, the applicant must use their assets to pay for care until assets have been spent down to the state's asset threshold. Similarly, an applicant who earns more income each month than allowed by their state must use the excess income above the state's threshold toward their own care costs each month.

Irrevocable Trusts vs. Revocable Trusts

Medicaid trusts, where allowed, provide some protection for assets transferred into trust. Rather than spending down all of their assets, grantors with properly-structured trusts that conform to state-specific requirements may be able to protect trust assets. To qualify, Medicaid trusts must be irrevocable. This means the grantor transfers assets into it and has no further access to or control over the assets. The grantor also cannot have any reversionary rights to assets.

This differs from revocable trusts, also called living trusts or inter vivos trusts. A grantor creating a revocable agreement generally retains the right to access, use, and control trust assets as well as to change or revoke the trust agreement. Revocable trusts are popular estate planning tools. However, they do not protect assets from being considered "available" for Medicaid purposes.

Lookback Period

When applying for Medicaid, applicants must report any gifts made or assets transferred to others for less than fair market value during the applicable "lookback" period. As of September 2018, the lookback period is 60 months.

If an applicant made a gift or transferred an asset within the lookback period, Medicaid imposes a penalty. Medicaid will not pay for the applicant's care during the penalty period, which is based on the value of the gifts made or assets transferred.

Assets transferred into irrevocable Medicaid trusts are generally treated as gifts. As such, they are subject to the lookback period rules. Therefore, careful advanced planning is important to ensure asset transfers do not impact the grantor's future eligibility for Medicaid.

While an irrevocable Medicaid trust is a helpful planning tool for some, it may be inadvisable to create one in some states or in certain situations. In such cases, they may not provide the desired protection or may come with unforeseen consequences. Before creating your own irrevocable Medicaid trust or taking other actions to qualify for Medicaid, consult an elder law attorney licensed in your state who can guide you through the process.

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.