I have discussed the use of Irrevocable Trusts in the past to facilitate asset preservation strategies for Medicaid Planning. The idea of an irrevocable document, however, understandably raises concerns over the inflexibility of the planning in the future.
If there is a possibility that you may need nursing home care in the future, there are essentially three ways to pay for those services. First, you can privately pay for the care. Second, you may have long term care insurance that covers the cost. Third, you may become eligible for Medicaid to pay for the services.
If you are interested in exploring options to avoid privately paying for nursing home costs and you do not have long term care insurance, then you may want to consider Medicaid Planning.
How do I become eligible for Medicaid?
Medicaid is a government provided, means tested benefit. This means that it is only available if your assets are below a certain level. In order to reduce your assets to the level of eligibility, you can either spend them down by privately paying for nursing home care or you can plan ahead and transfer some of your assets to others. Any transfers made more than five years before you apply for Medicaid will not adversely affect your eligibility.
How can I transfer assets?
There are a number of ways to transfer assets. You can simply do an outright transfer to another person, like a child or sibling. Outright transfers, however, have a number of downsides and transfers in trust are generally preferable.
If I transfer assets to a Trust, does it need to be Irrevocable?
To be effective for Medicaid Planning purposes, then yes – it needs to be an Irrevocable Trust. Despite that necessity, there are a number of ways that you can make changes after an Irrevocable Trust is created, which will give you flexibility in the future.
What kind of changes can be made to an Irrevocable Trust?
The three most common changes are the retention of a limited power of appointment to change beneficiaries, the ability to sell property within the Irrevocable Trust, and – believe it or not – the ability to revoke the Irrevocable Trust.
How does a limited power of appointment work?
As the creator of an Irrevocable Trust, you can retain a limited power of appointment, which allows you to change the beneficiaries of the Trust. In a typical case, a mother and father will establish an Irrevocable Trust and make their children the beneficiaries of the Trust assets after they both die (“the remainder beneficiaries”). By retaining a limited power of appointment, the parents can actually change the remainder beneficiaries in the future, despite the trust being irrevocable.
Why would you want to change a remainder beneficiary?
If, as in my example above, the remainder beneficiaries are your children, there may come a time in the future when you decide you no longer want to have one or more of your children as a remainder beneficiary. That could happen because you have a falling out with that child, or it could be because they have run into certain difficulties, such as divorce or bankruptcy. The flexibility of the limited power of appointment will allow you to restore them as a remainder beneficiary later, if your relationship improves with them or if they get clear of their difficulties.
It is permissible to sell assets in an Irrevocable Trust?
Yes. Commonly, people will place their home in an Irrevocable Trust, in an effort to protect it and allow it to pass on to their children. They may, however, not want to live in that home for the rest of their lives. If that is the case, the Trustees (often one or more of their children) can sell the house out of the Irrevocable Trust and receive the sale proceeds into the Trust. Those trust funds can then be used to buy another house, which the parents can live in as their new home. This often happens if the parents want to leave the northeast and retire to a warmer climate.
Can you actually revoke an Irrevocable Trust?
Yes. If all parties who have a beneficial interest in an Irrevocable Trust agree, then the Irrevocable Trust can be revoked, pursuant to section 7-1.9 of the New York Estates, Powers and Trusts Law. In a typical case where parents establish the Trust and the children are remainder beneficiaries, then both parents and all the children would have to agree to do so. If that happens, then any assets transferred to the Irrevocable Trust would go back to the parents’ ownership.
Why would you revoke an Irrevocable Trust?
The most likely reason would be because you were not successful in getting through the five-year lookback period on Medicaid transfers. Once the assets are back in the ownership of the grantors of the Trust, there may be other options to consider for Medicaid Planning.
Obviously, the word “irrevocable” can be concerning when you are contemplating estate planning. By virtue of this discussion, hopefully you can see that irrevocable does not necessarily mean without flexibility or change. In order to see whether an Irrevocable Trust should be part of your estate planning, you should consult an experienced elder law professional.
Matthew J. Dorsey, Esq. is a Shareholder with O’Connell and Aronowitz, 1 Court St, Saratoga Springs. Over his 26 years of practice, he has focused in the areas of elder law, estate planning, and estate administration. Mr. Dorsey can be reached at 518-584-5205, This email address is being protected from spambots. You need JavaScript enabled to view it. and www.oalaw.com.
