Paying for a nursing home can eat into your retirement savings significantly. The federally funded Medicaid program can cover some or all of the costs of a nursing home, but is limited to those with very limited financial resources. You may be eligible for federal assistance with nursing home costs even if you have significant assets if you place almost all of your assets in an irrevocable trust. An irrevocable trust can protect your money from nursing home costs, but it also has its own costs and disadvantages, including permanent loss of direct control of your assets. Talk to a financial advisor to learn more about ways to finance long-term care.
Foundations of irrevocable trust
A trust is a legal entity that many people set up as part of an estate plan. The trust acts as a container for assets transferred to it by the founder. A trustee is appointed to administer 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 once formed. This means that transferring assets to the trust is a one-way process. Assets, once invested, cannot be withdrawn from an irrevocable trust.
Irrevocable Medicaid Trusts
Irrevocable trusts come in a variety of flavors and can help with many different estate planning and other personal finance tasks. Medicaid trusts are used to reduce the impact of nursing home costs.
More specifically, Medicaid trusts are designed to help people qualify for Medicaid, the federal health insurance program. Unlike Medicare, which is not means-tested, Medicaid is only available to those with limited financial resources.
The program is administered by states, which set their own Medicaid eligibility requirements in different ways. In most cases, the annual income limit is $29,160 or less. This cap includes social security and pension benefits, as well as wages and investment income. Financial assets such as bank accounts, investments, revocable trusts, and real estate typically cannot exceed $2,000. People with higher incomes and wealth may have to spend their own wealth on nursing home care until their wealth drops to the point where they meet the Medicaid ceiling.
An irrevocable Medicaid trust is designed to help someone qualify for Medicaid without having to use up their own assets. After the trust is formed, they can transfer enough assets to bring them below Medicaid limits. Once they have done so, and provided they have followed the rules, Medicaid will pay part or all of the cost of their nursing home. In this way, an irrevocable trust can protect assets from nursing home costs.
Note that some people say it's unethical to use trusts to protect your assets from Medicaid. Others believe it's perfectly fine considering the rules and laws surrounding Medicaid. Ultimately, whether you use an irrevocable trust to protect your assets from the costs of a nursing home depends on your financial situation and your ethical thoughts and feelings.
Limits of Irrevocable Trusts
Irrevocable trusts have a number of limitations that anyone planning to use a trust should keep in mind. These include:
Easy transfer. Assets contributed to the trust cannot be taken out of the trust as long as the founder of the trust lives.
five-year period. Assets must be transferred to the trust at least five years before the donor wishes to become eligible for Medicaid. Irrevocable trusts cannot help at the last minute.
Medicaid does not always cover all costs. A Medicaid patient in a nursing home must still use their own income to pay most nursing home expenses. Medicaid often covers most, and sometimes all, of the cost, but patients usually shoulder some of the financial burden.
Not all nursing homes qualify. Medicaid only covers the cost of care in certain licensed nursing homes.
Other ways to protect assets from nursing home costs
An irrevocable trust is not the only tool available to help with nursing home costs. Here are some of the alternatives:
Long-term care insurance can cover some or all of the costs of a nursing home without having to consider Medicaid eligibility.
Medicaid-compliant annuities can earn income that is not included in the Medicaid income calculation.
An estate transfers ownership of assets in your estate to a spouse, so they do not count in determining Medicaid eligibility.
Financial gifts to family members can reduce your net worth enough to meet Medicaid guidelines.
An irrevocable trust can help you avoid paying for nursing home care out of your own funds by making you eligible for Medicaid. Medicaid can cover some or all of your costs, but only if you follow strict financial guidelines for income and assets. Placing assets in an irrevocable trust, called a Medicaid trust, can help even wealthy individuals comply with these guidelines. However, once assets have been transferred to an irrevocable trust, they cannot be reclaimed from the trust.
Long-term care planning tips
A financial advisor can help you devise a strategy for covering long-term care costs, using an irrevocable trust and other methods if necessary. Finding a financial advisor doesn't have to be difficult. SmartAsset's free tool puts you in touch with up to three verified financial advisors operating in your area, and you can have a free introductory call with your right advisors to decide which one you think is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Whether you're retired or still working, keeping a budget is a fundamental tool that will help you prepare for future needs, such as funding a nursing home. SmartAsset's Budget Calculator can tell you how your spending compares to others around you.
If you're thinking about getting long-term care insurance, be sure to check out our picks for the best long-term care insurance providers of 2023.
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