The move into assisted living can be a scary one. Not only does the new environment cause some sense of stress for the patient and family, but it can also be a huge financial burden to move into a nursing home. Medical care is costly, and the move into assisted living should not be taken lightly.

Although the financial commitment to live in a nursing home is significant, thankfully, Medicaid will help pay for those expenses. To many, this is a saving grace and lets them maintain a good quality of life in assisted living.

However, Medicaid is entitled to recover for the benefits received by taking control of the beneficiary’s assets, such as their home and vehicle upon their death. This can be unexpected if the family is not aware of Medicaid’s ability to do so.

Irrevocable Trusts

Luckily, the law has created ways to protect assets from Medicaid and keep them in control of the family or whomever the Medicaid recipient wishes. One way to do this is to set up an irrevocable trust—a trust that cannot be altered after the trust document is signed, unless specific circumstances occur. This is the benefit of an irrevocable trust; once the grantor puts property in it, in general, cannot be taken out. Therefore creditors, like Medicaid, cannot reach it.

Medicaid is a means-base test, so the size of your estate is relevant as to whether you qualify for Medicaid and how much funding you can receive. If your assets exceed a certain amount, then you do not qualify for Medicaid benefits. When assets are put into an irrevocable trust, their value is no longer included in the value of the grantor’s estate. Therefore, you may be able to meet the means test and qualify for Medicaid if you establish an irrevocable trust.

Because trust property is no longer considered personal property, the property a grantor transfers into an irrevocable trust does not add to the value of their estate for tax purposes. Like creditors cannot reach the trust property, the IRS is not able to tax it. This is beneficial for all estates, but especially for those worth more than $5.5 million. The estate tax rate for this dollar amount and above is 40%, or $2.2 million.

Planning

An important caveat to establishing an irrevocable trust for the purpose of protecting assets from Medicaid is that you must plan ahead. This is essential because of the five-year “look back” period. Any assets put into the trust within five years of attempting to qualify for Medicaid are not protected and are still considered part of the estate. Some sales or transfers to loved ones may be disallowed, which gives Medicaid the opportunity to reach your assets after you’ve passed away.

Though no one likes to think about the possibility of entering a nursing home, with life expectancy in America on the rise, it is becoming increasingly common. Irrevocable trusts are an easy way to give a person entering assisted living and his or her family some sense of security that the patient will receive a good quality of life and give some assurance that the rest of the family will be taken care of financially in the future.

If you’d like to discuss your options regarding the formation of a trust, please consult an attorney. At the Reid Law Firm, we are well-versed in the Alabama trust formation and regulation process. Trustees should have their trusts assessed annually. As rates go up and down and new policies are put in place, it is wise to keep a constant eye on how your savings are doing. You want to insure your money is continually handled in the most advantageous fashion.

If you’d like to discuss your financial options, please contact the Reid Law Firm today. If you'd like to schedule a time to talk, please call 205-913-7406! You can also text us at (205) 913-7406 for a quick answer to any legal question. Chris Reid can be reached by email at chris.reid@reidlawalabama.com. All communication to the Reid Law Firm is protected by attorney client privilege, so any information submitted will be held in confidence. Initial consultations are always free. For a complete list of our practice areas please visit www.reidlawalabama.com.

Special thanks to Dallas Coleman and Katie Pickle for their help in writing, researching, and editing this article.

Photo courtesy of Flickr user 401(K) 2012