What Is an Irrevocable Trust

Welcome and Introduction

Hey everybody. Welcome back to another episode of Protect Your Next with me, Brandon Lawrence, the Lawyer for the City. We had a previous episode, where we talked some about some estate planning in particular for Medicaid preparation to go into a nursing home. Today we’re going to go a bit deeper, a bit more in depth about how to do that. What are the vehicles to be able to assist you, to prepare yourself to go into a nursing home financially and meet the criteria for Medicaid eligibility?

And as I said before, we know that I ran some numbers and the 2026 numbers say that you can’t have in Kentucky, you can’t have any more than $2,982 per month in income. It also sets a $2,000 overall assets limit. That’s per person. It’s double if you are a married couple and before a single individual, those are the numbers.

So, when you are applying for Medicaid to prepare to go into a nursing home, you’ve got to meet a couple criteria medically and age wise to qualify for Medicaid. First of all, you’ve got to be 65 and older, maybe you’re blind, and not capable of taking care of yourself and needing professional medical nursing home care. You are able to establish these disabilities by a medical professional, and they can sign off on that and then say professionally that you need skilled nursing rehabilitative services, 24-hour care. That’s the first criteria. Then of course you have to, we talked about the financial portion of it, but a lot of people are qualified, but they have too much money.

A lot of people don’t sit down and think about how much money you have. You might say, I don’t have enough money.  I don’t have enough money to get what I want, car house, et cetera, the type of lifestyle that I want to live. But when you sit down, a lot of individuals, especially 65 and older, they’ve got some income coming in, because they’ve worked the majority of their lives. They might have a spouse that’s worked the majority of their lives and they might’ve passed away. And you could be also getting a portion of your spouse’s income or retirement after they pass away. And as well your retirement income. So you could be getting social security, social security disability, retirement income, your investment income, those types of things. And you have a home and a car and those types of things add up. So you’ve got to qualify financially to get Medicaid and you still might not be able to afford $20,000 for a nursing home.  And then you need Medicaid to supplement some of those payments and you’ve got to qualify for that.

The Medicaid Spend Down

So, to meet those criteria, you’ve got to do what has become a popularized term within the industry of a spend down, because of course once you apply, Medicaid from the date of the application, takes a look-back five years previous for any income or any assets that they could attach or take or accept for some type of Medicaid payment before you are eligible to get Medicaid nursing care. So those are some things that you’ve got to consider. And a lot of times, I would say most times you’re going to need a professional to help you with that. You’ve got to be able to protect your nest, and that’s the thing that we are able to assist you in doing. You need to get a professional’s help to make sure you qualify and to make sure you’re not losing any money and the government’s not coming into take some of your money, so to speak. So you want to avoid that.

Irrevocable Trust:  Shifting Ownership to Protect Assets

There are vehicles out there for you to do that. And usually they come in the form of a trust and people throw around terms and they say kind of just generally, but specifically there are specific types of trust that they can assist you with the spin down, qualifying for Medicaid, protecting your assets, and also your assets not being counted toward Medicaid and possibly disqualifying you from Medicaid and possibly having you pay more than you actually need to.

You want to use the assistance of a trust sometimes, and there are different types of trust you got. Generally, you got revocable and irrevocable trust. Revocable trust is just what it says. You can revoke it, you can take it away. You can take the assets out of the trust a little bit more easily. Then you have an irrevocable trust, which is more difficult, excuse me, once it’s set up to take an asset out of that trust. But the purpose of an irrevocable trust, it could be a couple purposes, dual purposes or multiple purposes. It could have tax ramifications. It could assist you with qualifying for Medicaid. And also make it so that certain your assets that you have are not counted when Medicaid takes that five year look-back.

I would say a revocable trust gives you a lot more flexibility with moving things in and out. And you can also with a revocable trust, you can still have some type of control over your assets, whereas when you have an irrevocable trust, you have to have a lot less control.  Everything goes into will be in someone else’s hand hands.

So with an irrevocable trust and a revocable trust, you’ve got a term, it’s called the grantor. The grantor is the individual that sets up that says, Hey, I want to set this trust up. That’s probably you. Alright, because it’s your asset and you’re putting your asset in that vehicle. Now then secondly, you’ve got a trustee. The trustee is the individual that operates the trust and basically has control and says how the income from assets are distributed, but they’re supposed to be distributed according to the grantor’s plan, but the trustee does have the most control.

Now then you also have a beneficiary, right? The beneficiary is the person of course that benefits from the actual trust, gets the income, gets the asset, those types of things.

Other Types of Trusts

So there are certain things that you can’t do with the trust, but if your main goal is to qualify for Medicaid, you’ve got something which is called a Medicaid Asset Protection Trust. And that holds the assets of a person that’s applying for the Medicaid. It’s an irrevocable trust that takes the assets from what they call the accountable resource limit. So Medicaid can’t say, Hey, this person’s, you’ve got a house and your house is worth X amount of dollars. So hey, you got to spend down a certain amount of money because that’s too many assets. Or you’ve got an investment plan that’s making X amount of dollars per month per year, and that’s going to count toward your monthly income.

Now what you can do is put these assets in the Medicaid Asset Protection Trust, hold it there, and it’s not going to count against that, alright? But of course when you put your home in a trust, the grantor are still responsible for the mortgage payments, for the insurance, for the taxes, alright? But then again, you can’t turn around and take another mortgage on the house and then money from that.  You lose that control. So that’s a part of the irrevocable part of it, that the whole point of it is you do not have control because technically that’s not your asset any longer. It belongs to the trust. And if when you put a house in the trust, you’ve got to go in and retitle it, make a deed, and basically make the trust the owner of that home because you’re not technically the owner of it anymore.

And then you have to also be careful when you take your home and put it in a trust. You’ve got to let the mortgage company know that that’s what you’re doing. So they don’t have a due-on-sale clause that kicks into effect and says, we’re demanding that this home be paid off right now because you’re trying to do something that’s beyond the pale of what our contract is. So these are things that you need an attorney or professional to assist you with so you don’t lose your assets. And so you don’t draw the attention negatively of the mortgage company or anyone is saying, Hey, you’re trying to do something that you’re not able to do. You want to be able to be above board and be able to be looked at as this is all legitimate. So that’s one type of trust, Medicaid Asset Protection Trust.

And then you also have life insurance. A lot of times if you try qualifying for Medicare, you want to get a term policy rather than a whole life policy. Because a whole life policy has got cash value that you could recoup, that you could turn the policy in for after quite a few payments. But there’s also a trust associated with life insurance, which is called the ILIT.  It’s an Irrevocable Life Insurance Trust. Alright? The trust is the beneficiary and the owner of the policy.  The grantor cannot be the trustee of the trust. And that’s with most of these trusts. The grantor can’t be the trustee because the whole point is you don’t have the ownership of it.

And that’s the key, the ownership to have any assets that are ascertainable by you or that you retain anything in that. So it’s important when you open up a trust, the grantor opens up a trust that you choose carefully, the trustee and also carefully the beneficiaries.

So back to the ILIT, right? Irrevocable Life Insurance Trust. What happens most of the time what you want to do is get a brand-new policy, get a brand new life insurance policy, and you can put that in the Irrevocable Life Insurance Trust. Because what happens if you have an existing policy that’s looked at kind of skeptically when you put that in the Irrevocable Life Insurance Trust, because that kind of triggers something that says, Hey, that’s just trying automatically to avoid any type of tax implications and things like that. And any assets being counted against you because you’ve had this policy for a period of time. But you can put an existing life insurance policy in the Irrevocable Life Insurance Trust.

There are certain parameters or criteria that you have to meet. You’ve got to live for at least three years after you put that existing policy in that trust.

So if you’re looking at qualifying for Medicaid and you want make sure that there any tax implications and that the money goes straight to, I guess the beneficiaries that you’d like to choose, you probably want to go ahead and get a new policy if you qualify for that policy, because we’ve already given you the statistics that the majority of individuals that go into nursing homes at an advanced age don’t live very long and stay in that nursing home very long. A lot of that is end of life care.

Another option is of course an Income-Only Trust that can assist you with qualifying for Medicaid. That’s often referred to as a Qualified Income Trust or a Miller Trust.  The trust works by allowing to grantor to deposit income exceeding Medicaid limits into a dedicated account.  So you’re making more money through investments or whatever income that you have, and to spend that down and not have that kind against you so you can’t qualify for Medicaid. You can open up a trust and put that remainder money in this Income-Only Trust to meet the Medicaid limits, these are certain ways, those are a couple trusts, there are many more, but those are just a few trusts that could help you qualify for Medicaid. And again, protect your nest.

You need to go to seek professional help to have them assist with you qualifying for Medicaid because it’s extremely important because this stuff is expensive and you may have enough money, but if you want to prepare for end of life type of situations and keep some of your income, pass that down and be allowed to stay in your house.

Legacy Preservation and Avoiding Estate Recovery

And also another thing, the nursing home can still get your home after you pass away if you’ve been living in a nursing home, because those assets are going to be attributable to you if you don’t protect yourself and have that home or those assets in some type of vehicle to avoid the probate.  Because, I’m sure you’ve heard stories where nursing homes getting people’s homes because a lot of the times the homes are almost or mostly paid for, and that’s the asset that the nursing home could take and liquidate.

So, if you want to be in the most control that you can, then these are some vehicles that you could use to assist you in qualifying for Medicaid, keeping a lot of your income, avoiding some type of tax ramification and passing that down. I mean, those are just simple things, but those are things that you probably need some help with.  Utilizing these tools and these options can help you again to protect your nest.

Conclusion

These are some short, simple ways, and also if you want to get some more in-depth conversation about these or go into more details, specifics on how to utilize these tools and some more tools, you can always contact me at LawyerForTheCity.org. You can email me, call me, and then we can set up an appointment and go in depth and look at what type of vehicle will be best for you. Would it be a revocable trust? Would it be an irrevocable trust? Will it be a Will? What are your plans? What are your goals for protecting your money for qualifying for Medicaid if you need to get into a nursing home? Because also in addition with the nursing homes, they only have a certain amount of Medicaid beds.  All the beds are not allocated for Medicaid. You have a certain amount of Medicaid beds, and this is with memory care, with nursing homes and other type of senior facilities that serve the aging population.

The best thing that you can do is try to prepare early, as early as you can and to put yourself in the most advantageous position because obviously it’s extremely important. And hopefully we’re all going to age into a ripe old age, and some of us are going to need more assistance than others. And we don’t really know what situation we’re going to be in, if we’ll have our spouse, if we won’t, if we’ll have our family around, if we won’t. So we want to take the most precautions and make the best plan that’s going to be most beneficial to us. And that’s what we all strive to do.

There are tools out there to help you to do that, and you want to take advantage of them and go to a professional that can help you out and assist you with making the best plan most suitable for you. And I thank you for listening. Look forward to coming back and give you some more information on another episode of Protect Your Nest. And in the meantime, it’s getting warm out there. The snow is melting, but still watch your step and take care of yourself. Until next time, this is Brandon Lawrence, the Lawyer for the City.