For elderly individuals in need of constant nursing care, the costs of assisted living facilities and/or at-home help can be overwhelming. According to a 2019 Genworth survey, the average daily nursing home costs exceed $247 and can be significantly higher in certain metropolitan areas.
Medicare, the federal health care program for seniors aged 65 and above, only covers nursing home expenses when one enters a facility for short-term rehabilitation. Medicaid, a joint federal and state program, can cover the balance. But in order to qualify for the latter, a person's total countable assets—including cash parked in bank accounts, plus investments such as mutual funds, stocks, and bonds, may not exceed $2,000 to $3,000, depending on the state.
Consequently, people often exhaust their life savings before Medicaid kicks in, making it difficult to leave an inheritance or to provide for surviving dependents, such as grown children with special needs. Fortunately, by shifting assets into a trust, individuals may qualify for Medicaid, while preserving a portion of their wealth for their loved ones.
- Medicaid can provide valuable assistance for those who need to relocate to an assisted living facility. However, this program only kicks in for individuals with a low amount of assets.
- By placing assets into an irrevocable trust, a person may both qualify for Medicaid, and still preserve a portion of their assets, for their loved ones.
- Medicaid currently imposes a five-year “look back” period, where any money transferred into a trust five years before a person applies for Medicaid, may delay the benefits from kicking in.
Types of Trusts
The two basic kinds of trusts are: revocable and irrevocable. As the name implies, revocable trusts can be revoked. Therefore, Medicaid considers assets in such an account to be still owned by the person who established it. And if that amount exceeds the countable assets limit, that individual will disqualify for assistance.
On the other hand, an irrevocable trust effectively lets a person transfer control of his or her money to a trustee, allowing him or her to qualify for Medicaid. But there is a lag time, due to Medicaid's current five-year “look back” period, where any money transferred into a trust five years before a person applies for Medicaid, may delay the eligibility for benefits. The length of the delay, known as the “penalty period”, is determined by dividing the value of the transferred funds by Medicaid’s “regional rate” for nursing home care, in a given region.
For example, in an area with a regional rate of $10,000 a month, an individual who transfers $100,000 into a trust before entering a nursing home would be ineligible for a total of 10 months of Medicaid assistance. In this case, someone (typically a family member) would have to pay the nursing home out of pocket, before Medicaid began covering the bills, which effectively wipes out any advantage of putting $100,000 into the trust. Alternatively, if that individual transferred the assets more than five years earlier, he or she could immediately qualify for aid.
Other Advantages of a Trust
Trusts offer numerous other advantages. For one, a trust is a separate legal entity, so the money is generally safer than it would be if it were simply handed to a family member, who may be vulnerable to lawsuits, divorce, or other misfortunes, that may put that money at risk.
Trust assets benefit from a step-up in basis, which can mean substantial tax savings for the heirs. By contrast, assets that are simply given away during the owner’s lifetime typically carry his or her original cost basis.
Consider the following calculation. Let's assume that shares of stock costing $5,000 when originally purchased, are worth $10,000 when the beneficiary of a trust inherits them. In this case, that stock would have a basis of $10,000. Had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. Later, if the shares were sold for $12,000, the person who inherited them from a trust would owe tax on a $2,000 gain, while someone who was given the shares would owe tax on a gain of $7,000. Simply put: the tax consequences on assets received from a trust are greatly reduced.
By combining the creation of an irrevocable trust with a promissory note or the purchase of a private annuity, many people can still preserve 40% to 50% of their assets.
Choose the Right Trustee
A properly-drawn trust will not only preserve an individual's assets but also gives trustees the discretion to distribute money to beneficiaries, who in turn can spend it for the older person’s benefit. For this reason, it's essential to appoint a reliable person as trustee.
You can name a bank as either the trustee or a co-trustee.
The Bottom Line
People who need financial assistance from Medicaid don’t necessarily have to exhaust their life savings in order to qualify for aid. A properly-drawn irrevocable trust can protect at least a portion of their assets, both for their own benefit and for that of their heirs.