This article is the last a series of nine articles explaining the Eight Goals of a Good Estate Plan. In this Article we will explain how to use Life Estates and Irrevocable Trusts to make yourself eligible for Medicaid assistance for long-term care without losing your assets and to prevent Medicaid from seizing your assets upon your death.
Estate planning is crucial for managing and protecting your assets, avoiding probate, reducing taxes, and ensuring your healthcare wishes are honored. Our survey revealed that while only 41.7% of respondents have created an estate plan, over 50% cited "protecting my family" as the primary reason for doing so. The most common documents included are a will (40.3%) and power of attorney (37.3%). However, only 27.8% have discussed their plans with family. This highlights the importance of estate planning in safeguarding your loved ones' future. Learn more here.
Assisted living care can be extremely expensive. Fortunately, if you qualify for Medicaid, the government will foot the bill for this care. Unfortunately, in order to qualify for Medicaid, you must show that you have already expended most or all of your assets. You cannot qualify for Medicaid unless you have less than $14,400.00 in countable resources.
In addition, if your estate has remaining assets at the time of your death, the government has the right to seize those assets to pay for you end-of-life care, preventing them from transferring to your loved ones.
5 Year Look-Back Period
Gifts made within five years prior to applying for Medicaid nursing home assistance will disqualify you for Medicaid benefits for a certain period of time depending on the size of the gift. In addition, any such gifts may be reversed after you pass, allowing the government to seize the assets despite the gift.
Life Estate Deeds and Irrevocable Living Trusts
Life Estate Deeds and Irrevocable Living Trusts can be used to (1) qualify for Medicaid assistance while still preserving your assets; and (2) pass your remaining assets to your loved ones without them being subject to a Medicaid Lien.
Life Estates
As we discussed in last week’s article, 8 Estate Planning Goals: How to Protect Assets from Creditors, in order to create a Life Estate in a piece of real estate, you must change the deed to your property in order to give someone else (usually a family member), called a Remainderman, the right to possess the property after you pass away, while you retain the right to possess the property during your lifetime.
Unlike a Revocable Living Trust, once you transfer your property to a Life Estate you will no longer have the right to change this arrangement without the consent of the Remainderman. This includes selling the property, encumbering the property with loans, or selecting a different person to inherit the property.
So long as the Life Estate Deed is executed more than five years prior to applying for nursing home Medicaid benefits, the real estate will not qualify as an asset for the purpose of calculating your Medicaid eligibility. Nor will the asset be subject to a Medicaid Lien after you pass. Life Estate Deeds are a great way to keep the family home in the family, while retaining your right to live there for the remainder of your life.
Irrevocable Trusts
Using Irrevocable Trusts, also known as Medicaid Trusts, you can transfer assets out of your estate for Medicaid purposes while still retaining some benefit of the assets. In order to be effective, you must name someone other than yourself as trustee. You will be able to continue to receive income from the trust, but you will no longer have access to the principal. So long as the trust is created and funded prior to the five-year look-back period, the assets in the trust will not count against you when determining your Medicaid eligibility, and will not be subject to Medicaid liens upon your death.
Life Estate Deeds vs. Irrevocable Trusts
- A Life Estate Deed is less expensive to establish than an Irrevocable Trust;
- If property held by a Life Estate Deed is sold during your lifetime, the proceeds of the sale must be used to satisfy your medicaid debt. The proceeds of the sale of property held in an Irrevocable Trust may be kept in the trust and will not be subject to Medicaid.
- If the property held by a Life Estate Deed is rented during your lifetime, the net profit from the rental must be paid to Medicaid. This is not the case for an Irrevocable Trust.
- Life Estate Deeds only apply to real estate. Irrevocable Trusts can house nearly any sort of asset.
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