Paying for a nursing home can seriously deplete your retirement savings. The government-funded Medicaid program can pay some or all nursing home costs, but it’s restricted to people of very limited financial means. You may be able to qualify for government assistance with nursing home costs, even if you control substantial wealth if you transfer nearly all your assets into an irrevocable trust. An irrevocable trust can protect your money from nursing home costs, but they have costs and drawbacks of their own, including permanently losing direct control of your assets. Talk to a financial advisor to learn about options for paying for long-term care.
Irrevocable Trust Basics
A trust is a legal entity many people create as part of an estate plan. The trust acts as a container for assets transferred into it by the grantor. A trustee is appointed to manage the assets in the trust for the benefit of one or more beneficiaries.
A trust can be revocable or irrevocable. You can make changes to a revocable trust after establishing it, including removing assets from the trust. Irrevocable trusts, however, cannot be changed after establishment. That means transferring assets to the trust is a one-way process. Once in, assets cannot be removed from an irrevocable trust.
Irrevocable Medicaid Trusts
Irrevocable trusts come in several varieties and can help with many different estate planning and other personal finance tasks. Medicaid trusts are the kind used to help reduce the impact of nursing home costs.
More specifically, Medicaid trusts are designed to help people qualify for Medicaid, the government health insurance program. Unlike Medicare, which is not means-tested, Medicaid is only available to people of limited financial means.
The program is administered by states, which determine their own Medicaid eligibility requirements in a variety of ways. In most, the annual income limit is $29,160 or less. This cap includes Social Security and pension benefits as well as wages and investment income. Financial resources such as bank accounts, investments, revocable trusts and real estate typically can’t total more than $2,000. People who have more income and more assets may have to spend their own assets to pay for nursing home care until their assets have declined to the point they meet the Medicaid caps.
An irrevocable Medicaid trust is designed to help someone qualify for Medicaid without having to deplete their own assets. After creating the trust, they can transfer in enough assets to bring them below Medicaid’s caps. Once they have done that, assuming they have followed the rules, Medicaid will pay some or all of their nursing home costs. In this way, an irrevocable trust can protect assets from nursing home costs.
Keep in mind that some people say it’s unethical to use trusts to shield your assets from Medicaid. Others believe it’s perfectly fine, considering the rules and laws set up around Medicaid. Ultimately, whether you use an irrevocable trust to protect your assets from nursing home costs will be based on your financial situation, as well as your thoughts and feelings on the ethics.
Talk to a financial advisor to see if a particular trust might be a good solution for your circumstances.
Limits of Irrevocable Trusts
Irrevocable trusts have a number of limitations that anyone planning to use one will want to keep in mind. These include:
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One-way transfer. Assets placed in the trust can’t be taken out of the trust for as long as the grantor of the trust is alive.
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Five-year limit. Assets must be transferred into the trust at least five years before the grantor seeks to acquire Medicaid eligibility. Irrevocable trusts can’t help at the last minute.
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Medicaid doesn’t always pay all costs. A Medicaid patient in a nursing home still has to use their own income to pay for most nursing home costs. Medicaid will often pay for most and sometimes all of the costs, but patients usually shoulder some of the financial burden.
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Not all nursing homes qualify. Medicaid only pays for care in certain approved nursing homes.
Other Ways to Protect Assets from Nursing Home Costs
An irrevocable trust is not the only tool available to help with nursing home costs. Here are some of the alternatives:
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Long-term care insurance can cover some or all nursing home costs without having to consider Medicaid eligibility.
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Medicaid-compliant annuities can be used to generate income that isn’t included in Medicaid’s income assessment.
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A life estate transfers ownership of assets in your estate to a spouse, removing them from consideration when determining Medicaid eligibility.
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Financial gifts to family members can reduce your net worth enough to meet Medicaid’s guidelines.
Bottom Line
An irrevocable trust can help you avoid having to use your own assets to pay for nursing home care by making you eligible for Medicaid. Medicaid can pay some or all of your costs, but only if you meet strict financial guidelines for income and assets. Transferring assets into an irrevocable trust, called a Medicaid trust, can help even people with significant assets meet these guidelines, But once assets are transferred to an irrevocable trust, they can’t be retrieved from the trust.
Tips for Long-Term Care Planning
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A financial advisor can help you design a strategy for covering long-term care costs using an irrevocable trust, if appropriate, as well as other methods. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. You can also read SmartAsset reviews.
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Whether you are retired or still working, keeping a budget is a basic tool to help you for prepare for future needs such as paying for a nursing home. SmartAsset’s Budget Calculator can tell you how your spending stacks up to other people in your area.
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If you thinking about purchasing long-term care insurance, be sure to review our picks for the top long-term care insurance providers of 2023.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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