Does an Irrevocable Trust Protect Assets from Nursing Homes?

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, provided 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.

Connect with a financial advisor for free and 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 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.

Protecting Your Assets With an Irrevocable Medicaid Trust

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.

Each state oversees its own Medicaid program and sets specific rules for who qualifies. Generally, applicants must report yearly earnings of about $34,812 or less, ¹ with that figure covering not only wages but also income from Social Security, pensions and investments. Beyond income, most states also impose strict limits on countable resources: bank deposits, stocks, revocable trusts and property other than a primary residence usually cannot exceed $2,000 in value. Individuals whose income or assets exceed these thresholds often must first use their savings to cover long-term care costs until they fall below the Medicaid limits.

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 of such a decision.

Limits of Irrevocable Trusts

Irrevocable trusts have limitations and related planning considerations that anyone thinking about using one should keep in mind. These include:

• Permanent transfer: Assets placed in the trust generally cannot be taken back or used by the grantor once the trust is established.
• Loss of control: The grantor typically gives up control over how trust assets are managed and distributed, since a trustee administers the trust.
• Five-year lookback for Medicaid: Assets usually must be transferred into the trust at least five years before applying for Medicaid to avoid penalties. Irrevocable trusts do not provide last-minute Medicaid planning solutions.

Note: People sometimes use irrevocable trusts as part of Medicaid planning, but Medicaid eligibility does not mean all long-term care costs disappear. Even after approval, residents often must use most of their income toward nursing home costs, and Medicaid only pays for care in certain approved facilities.

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:

• Long-term care insurance can cover some or all nursing home costs without having to consider Medicaid eligibility.
• Medicaid-compliant annuities can be used to generate income that isn’t included in Medicaid’s income assessment.
• A life estate transfers ownership of assets in your estate to a spouse, removing them from consideration when determining Medicaid eligibility.
• 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, sometimes called a Medicaid trust, can help even people with significant assets meet these guidelines. But once assets are transferred to an irrevocable trust, they generally cannot be taken back.

However, using an irrevocable trust for Medicaid planning is not always straightforward. 

“Setting up an irrevocable trust as part of a strategy to qualify for Medicaid can get tricky if your wealth is largely held in retirement accounts. It will be considered a withdrawal and trigger a tax event. You also have to contend with the timing of asset transfers to a trust, since there’s a five-year lookback period for Medicaid eligibility to determine whether any assets were gifted or sold for less than their fair market value, though the window may be shorter in some states,” says Tanza Loudenback, CFP®.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tips for Long-Term Care Planning

• 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 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.
• 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.
• If you thinking about purchasing long-term care insurance, be sure to review our picks for the top long-term care insurance providers.

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