Paying for a retirement home can seriously deplete your retirement savings. The government-funded Medicaid program can pay some or all of the costs of nursing homes, but it is limited to people with very limited financial means. You may qualify for government assistance with nursing home expenses, even if you control substantial wealth if you transfer substantially all of your assets into an irrevocable trust. An irrevocable trust can protect your money from nursing home costs, but it has its own costs and disadvantages, including permanent loss of direct control of your assets. Speak to a financial advisor to learn more about long-term care payment options.
The basics of irrevocable trust
A trust is a legal entity that many people create as part of an estate plan. The trust acts as a container for the assets transferred into it by the settlor. A trustee is appointed to manage the assets of the trust for the benefit of one or more beneficiaries.
A trust can be revocable or irrevocable. You can make changes to a revocable trust after you set it up, including removing assets from the trust. Irrevocable trusts, however, cannot be changed after they are created. This means that transferring assets to the trust is a one-way process. Once entered, assets cannot be removed from an irrevocable trust.
Irrevocable Medicaid Trusts
Irrevocable trusts come in many varieties and can help with many estate planning and other personal finance tasks. Medicaid trusts are the type used to help reduce the cost impact of nursing homes.
Specifically, Medicaid trusts are designed to help people qualify for Medicaid, the government health insurance program. Unlike Medicare, which is not means-tested, Medicaid is only available to people with limited financial means.
The program is administered by states, which determine their own Medicaid eligibility requirements in various ways. In most cases, the annual income cap is $29,160 or less. This ceiling includes social security and pension benefits as well as wages and investment income. Financial resources such as bank accounts, investments, revocable trusts, and real estate generally cannot total more than $2,000. People with more income and more assets may have to spend their own assets to pay for nursing home care until their assets have dwindled to the point of reaching Medicaid limits.
An irrevocable Medicaid trust is designed to help a person qualify for Medicaid without having to deplete their own assets. After creating the trust, they can transfer enough assets to bring them back below Medicaid limits. Once they’ve done that, assuming they’ve followed the rules, Medicaid will pay some or all of their nursing home costs. In this way, an irrevocable trust can protect assets from nursing home costs.
Keep in mind that some people say it’s unethical to use trusts to protect your Medicaid assets. Others think that’s perfectly fine, given the rules and laws put in place around Medicaid. Ultimately, whether you use an irrevocable trust to protect your assets from nursing home costs will depend on your financial situation, as well as your thoughts and feelings about ethics.
Limits of Irrevocable Trusts
Irrevocable trusts have a number of limitations that anyone considering using one should keep in mind. These include:
One way transfer. Assets placed in the trust cannot be withdrawn from the trust while the settlor of the trust is alive.
Five-year limit. Assets must be transferred into the trust at least five years before the grantor seeks to acquire Medicaid eligibility. Irrevocable trusts cannot help at the last minute.
Medicaid does not always pay all costs. A Medicaid patient in a nursing home must still use their own income to pay for most nursing home costs. Medicaid will often pay most and sometimes all of the costs, but patients usually bear some of the financial burden.
Not all nursing homes are eligible. Medicaid only pays for care in certain licensed nursing homes.
Other Ways to Protect Nursing Home Cost Assets
An irrevocable trust isn’t the only tool available to help with nursing home costs. Here are some alternatives:
Long-term care insurance can cover all or part of nursing home costs without having to consider Medicaid eligibility.
Medicaid-compliant annuities can be used to generate income that is not included in the Medicaid earnings test.
A life estate transfers ownership of assets from your estate to a spouse, removing them from consideration when determining eligibility for Medicaid.
Financial gifts to family members can reduce your net worth enough to meet Medicaid guidelines.
An irrevocable trust can help you avoid having to use your own assets to pay for nursing home care by making you eligible for Medicaid. Medicaid may pay some or all of your costs, but only if you meet strict financial guidelines regarding income and assets. Transferring assets into an irrevocable trust, called a Medicaid trust, can help even people with large assets meet these guidelines. But once the assets are transferred to an irrevocable trust, they can no longer be recovered from the trust.
Advice for planning long-term care
A financial advisor can help you design a strategy to cover long-term care costs using an irrevocable trust, if available, and other methods. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Whether you’re retired or still working, budgeting is a basic tool to help you prepare for future needs like paying for a retirement home. SmartAsset’s budget calculator can tell you how your spending compares to other people in your area.
If you’re considering long-term care insurance, be sure to check out our picks for the best long-term care insurance providers in 2023.
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