Key Takeaways
- 1Irrevocable trusts can protect assets from nursing home costs
- 2The 5-year lookback period is critical - plan ahead
- 3You give up control of assets placed in irrevocable trusts
- 4Your home may be protected while you live, but exposed after death
- 5Each state has different Medicaid rules
- 6Work with an elder law attorney for proper planning
- 7Precious metals in a trust can provide diversification and protection
Countable Assets
- Bank accounts and CDs
- Stocks, bonds, and investments
- Second homes and rental properties
- Cash value life insurance (over $1,500)
- Retirement accounts (IRA, 401k)
Exempt Assets
- Primary residence (with intent to return)
- One vehicle
- Personal belongings and household items
- Prepaid funeral and burial plots
- Small life insurance policies (under $1,500 face value)
How Irrevocable Trusts Protect Assets
An irrevocable trust is a legal arrangement where you transfer ownership of assets to the trust. Once transferred, you no longer own these assets - the trust does. This is crucial for Medicaid planning because Medicaid can only count assets you own.
- Ownership transfer - Assets in an irrevocable trust are no longer legally yours.
- Medicaid can't count them - After the lookback period, trust assets don't count toward Medicaid limits.
- You can still benefit - The trust can pay for expenses or let you live in the home.
- Must be truly irrevocable - You cannot retain control or the ability to revoke.
- Trustee manages assets - You appoint a trustee (often your child) to manage trust assets.
Timing Is Everything
An irrevocable trust must be established at least 5 years before applying for Medicaid. Transferring assets within the lookback period creates penalties.
Understanding the 5-Year Lookback Period
When you apply for Medicaid, they review all asset transfers made in the past 60 months (5 years). Transfers during this period result in a penalty period where Medicaid won't pay for nursing home care.
- 60 months nationally - Federal law sets the lookback at 5 years for all states.
- Penalty calculation - Divide transferred amount by average monthly nursing home cost.
- Example - Transfer $150,000 ÷ $10,000/month = 15-month penalty period.
- Penalty starts at application - You're ineligible for 15 months after applying, not after transfer.
- No partial penalty - Even small gifts within 5 years can trigger review.
| Transfer Amount | Avg. Monthly Cost | Penalty Period |
|---|---|---|
| $50,000 | $10,000 | 5 months |
| $100,000 | $10,000 | 10 months |
| $250,000 | $10,000 | 25 months |
| $500,000 | $10,000 | 50 months |
Penalty periods based on example nursing home costs
Types of Protective Trusts
Several types of irrevocable trusts can help with Medicaid planning. The right choice depends on your situation.
- Medicaid Asset Protection Trust (MAPT) - Most common. Removes assets from your estate while allowing income and use of assets.
- Income-Only Trust - You receive trust income but not principal. Popular in many states.
- Life Estate - Keep the right to live in your home while transferring ownership. Simpler but less flexible.
- Spousal Lifetime Access Trust (SLAT) - One spouse creates trust for the other. Can work for Medicaid and estate planning.
- Irrevocable Funeral Trust - Specifically for funeral expenses. Usually exempt from Medicaid counting.
Countable vs. Exempt Assets
Medicaid only counts certain assets toward its limits. Understanding the difference helps you know what needs protection.
- Countable assets - Bank accounts, investments, second homes, retirement accounts, and cash.
- Exempt assets - Primary home (with conditions), one car, personal belongings, prepaid burial.
- Asset limit - Typically $2,000 for individual, varies for married couples by state.
- Income limit - Your income must also be under state limits, though trusts can help here too.
- Community spouse protection - Married couples have special rules allowing the healthy spouse to keep more assets.
| Asset Type | Countable? | Notes |
|---|---|---|
| Primary Home | No* | Protected while living, may face recovery after death |
| Bank Accounts | Yes | Must spend down below limit |
| Investments | Yes | Stocks, bonds, mutual funds count |
| One Vehicle | No | One car exempt regardless of value |
| Retirement IRA/401k | Varies | Rules differ by state and applicant status |
| Prepaid Funeral | No | Irrevocable funeral trusts exempt |
Protecting Your Home
Your home is often your largest asset. While it's exempt during your lifetime, Medicaid can seek recovery from your estate after death.
- Lifetime exemption - Your home is not counted while you or your spouse lives there or intends to return.
- Estate recovery - After death, Medicaid can file claims against your estate to recover costs.
- MAPT protection - Putting home in irrevocable trust protects from estate recovery (if done 5+ years prior).
- Lady Bird deed - In some states, this avoids probate and protects from recovery without losing control.
- Life estate - Keep the right to live there while transferring ownership. Creates partial gift for lookback.
State Variations Matter
Home protection strategies vary significantly by state. What works in Florida may not work in California. Consult a local elder law attorney.
When Should You Act?
The 5-year lookback makes early planning essential. Don't wait until you need care.
- 1Age 60-65 - Ideal time to start planning. Gives plenty of time before likely need.
- 2Before health decline - Once diagnosed with dementia or chronic illness, your options narrow.
- 3While mentally competent - You must have capacity to execute legal documents.
- 4Before any nursing home stay - Even a short stay can trigger spend-down and limit options.
- 5At least 5 years before need - The lookback period requires advance planning.
- 6When healthy spouse needs protection - Married couples should plan before either needs care.
State-Specific Notes
Precious Metals in Your Planning Strategy
When protecting assets in trusts, diversification matters. Physical gold and silver in a self-directed IRA can be held by a trust, providing both protection and growth potential.
- Self-directed IRA can hold physical precious metals
- Trust can be beneficiary of Gold IRA
- Metals provide hedge against market volatility
- No counterparty risk with physical gold
- Can be part of diversified estate plan
Frequently Asked Questions
Can I put my house in an irrevocable trust and still live in it?
Yes. A properly drafted irrevocable trust can give you the right to live in your home for life (called a retained life estate). You continue living there as normal, but ownership transfers to the trust, protecting it from Medicaid estate recovery after the 5-year lookback period.
What happens if I need nursing home care within 5 years of creating the trust?
If you apply for Medicaid within 5 years of transferring assets to the trust, Medicaid will calculate a penalty period. During this penalty, Medicaid won't pay for your nursing home care. The length depends on how much you transferred. You'll need to private pay or find other coverage during the penalty period.
Can I get my assets back from an irrevocable trust?
Generally, no. That's what makes it "irrevocable." However, some trusts have provisions allowing trustees to make distributions for your benefit. Others can be modified through court action if all beneficiaries agree. But the basic principle is that you give up control.
Will an irrevocable trust protect assets from estate taxes?
It depends on the trust type. Medicaid Asset Protection Trusts are typically included in your estate for estate tax purposes but excluded for Medicaid purposes. For estate tax protection, you'd need a different trust structure. Most people don't have estate tax concerns (exemption is $13.61M in 2024).
Should I transfer retirement accounts to an irrevocable trust?
Generally not directly - transferring an IRA or 401(k) to a trust triggers immediate taxation on the entire balance. Instead, consider naming the irrevocable trust as beneficiary of your retirement accounts. This provides protection while maintaining tax deferral. Consult with a tax advisor.