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Learning Your Way Around Trusts – Revocable Living Trusts and Medicaid Trusts

Medicaid Trusts are typically Irrevocable Trusts. Irrevocable Trusts can’t be changed after they’re created and they’re drafted to only pay out income, not principal. People opt for a Medicaid Trust and limited access when they want to protect assets from being decimated by long-term care expenses.

In contrast, the most well-known trust is a Revocable Trust. Revocable Trusts can be changed or rescinded by the person who created it. What’s more, the funds that make up the trust are fully accessible to the creator. These trusts are used to avoid the expense and aggravation of probate and to allow more control of the distribution of the assets after you pass away. However, the assets in a Revocable Trust are countable assets in determining Medicaid eligibility and therefore of very little use in protecting assets or qualifying for Medicaid.

You can’t just place assets in a Medicaid Trust or give them away when the writing is on the wall and you know that you’re going to need considerable care before you die. To prevent everyone from giving everything away when they learn they need care in order to qualify for Medicaid there’s a penalty period. The penalty period is measured by something known as the five-year look-back period. This is the period of time which must be satisfied before assets given away or placed in an Irrevocable Trust are considered exempt. Until those five years pass your assets must be applied toward your long-term care. In other words, you cannot have recently transferred assets so that you move into a nursing home on Monday, give all your money to your children Tuesday and qualify for Medicaid on Wednesday.

Clients often ask me how the government will know that they gave away assets or be able to calculate when they gave them away. The Government knows! The Department of Social Services has full access to all of your accounts, transfers, checks and assets.

The goal of good planning is to put a plan in place which will allow you to safeguard some or all of your assets while still heeding the restrictions and rules put in place to protect the applicant and the system.

Trusts are extremely useful but complicated tools that can help you with asset protection and court avoidance. Give the Law Offices of Cheryl David a call, and we will help you decide whether a trust is right for you and work together to set one up.

Regardless of your situation entering a trust like this should not be a quick choice, and there are a few things to know before you sign that dotted line:

  • The complexity of designing a Revocable or Irrevocable Trust is more complicated than a simple will and will likely cost more up front. However, if the Trust is done correctly when you get sick or pass away the court process as well as the higher costs associated with a will may be mitigated. Several notes of caution – With Revocable Trusts you’ll need to be diligent and transfer existing assets to the trust, transfer assets to the trust as you acquire them and remove assets you no longer own. With Irrevocable Trusts you must be careful not to make additional transfers to the trust because such transfers may restart the five-year look-back. That doesn’t mean you shouldn’t do a trust, just that you should be aware of the costs.
  • Assets you accidentally leave out of the trust may be subject to probate. That means even modest bank or investment accounts must go through the probate process; and then, after you die, your estate may face more expenses. The trust may need to  file tax returns and value assets.
  • A little-known major Revocable Living Trust benefit comes into play if the creator becomes incompetent. Then, the alternate trustee takes over management of trust assets without court costs and delays of appointing a Conservator or going through a Guardianship.
  • A Revocable Living Trust is usually easy to change. The terms can be changed or revoked until the trustor dies- that’s when they become irrevocable. This often prevents a surviving spouse from disinheriting a beneficiary named in the living trust- for example a child from the deceased spouse’s first marriage.

Trusts are excellent tools for the protection of your estate. For the best results, guidance is needed to decide what is right for you and how to implement it. Give the Law Offices of Cheryl David a call to discuss whether a Medicaid Trust or a Revocable Living Trust are right for you.

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