We are asked about asset protection in almost every estate planning meeting. Specifically, we are asked some variation of the question:
“How do I protect my [house, cabin, investments, etc.] if I end up needing nursing home care?”
Our approach is very different from some other firms, and this article explains why.
Understanding Medicaid
To understand our philosophy, the first thing to understand is how long term care is paid for. As a general rule, the federal government does not pay for long term care. The government considers long term care to be a living expense, not a medical expense. So just as the government will not pay for a senior citizen’s house payment or rent, they will not pay for the costs of that person’s assisted living or nursing home care.
There are two exceptions. First, short nursing home or assisted living stays for rehabilitation are considered medical and covered by the Medicare program. The length of coverage varies depending on the situation but is generally no more than 90 days.
Second, long term care can be covered by Medicaid. The Medicaid program is considered a welfare program (the same statute governs BadgerCare and FoodShare benefits) and is only available to those who qualify based on need. To oversimplify a bit, the rules are:
A single person is eligible only if they have minimal assets.
A married person is eligible if the couple’s countable assets are under a number between $50,000 and $154,000 (in 2024) set by a formula. Certain assets are not counted. Those include a homestead, a vehicle, and IRA assets titled to the spouse who does not need care.
The person or couple cannot have given away substantial assets in the five-year period preceding the application. (This is called the lookback period.)
Contrary to what many people think, the government will not try to take anything away from them if they need care. The government will simply deny Medicaid eligibility, and the person needing care will need to pay for it with their own funds. If they refuse, the facility will ask them to leave.
How Irrevocable Trusts Fit In
A common asset protection strategy is to make lifetime gifts well before care might be needed. So, for example, a couple might transfer their cabin to their children when they have just retired and are otherwise healthy. In that case, if they need care more than five years from the date the transfer is made, the cabin will belong to their children and would not be considered if they apply for Medicaid at that time. This is a perfectly valid asset protection strategy that does not require a trust. We sometimes recommend this for recreational property or other property that our clients do not need for their retirement.
The risk of direct gifts (from a client perspective) is that they now belong to the recipient. So, in the example above, the cabin now belongs to the children. They might sell it, or a child might unexpectedly divorce, become disabled, pass away, or run into financial problems. In that case the cabin will be wrapped up in the child’s personal financial problems and could be lost to creditors or go somewhere unintended.
This might be fine for a recreational property (after all, it was always intended to transfer to children and be exposed to their financial issues) but is less attractive when the asset is a homestead or other asset that our client needs for their retirement.
Irrevocable trusts are designed to solve some of the problems associated with direct gifts. Assets in an irrevocable trust no longer belong to the original owner and trust creator (meaning they are not counted when determining Medicaid eligibility) but also do not belong to the children yet (meaning they are not exposed to the child’s personal financial issues).
Magic or a Trade-Off?
To some, an arrangement that creates eligibility without risks of direct gifts seems like magic, and some practitioners promote irrevocable trusts as a kind of magic bullet.
We respectfully disagree. We see them as a real financial trade-off, with a real benefit and real risks that need to be taken seriously by our clients.
The benefit, of course, is that trust assets will not be considered when determining eligibility. The risks and other costs are a bit more complicated.
Irrevocable Trust Risks and Costs
The key risks of an irrevocable trust are:
The trustee cannot be the original owner. The trustee generally is the most trusted child. This means trust assets are controlled by one of the children, not the original owner.
The asset has really been given away to the trust. The trustee cannot give it back to the original owner.
The trust contains broad lifetime distribution provisions that allow the trustee to transfer assets to the trustee or other children during the original owner’s lifetime. The idea is that the children could then give money or property back to the original owner to pay for care if need be. However, this broad provision can be abused by the trustee.
For a married couple, the tax treatment of trust assets received by the children at the death of the surviving spouse is less favorable than if the assets had been retained by the couple.
If the trust has assets that generate income (for example, rental properties or stock holdings) the trustee will need to have an accountant prepare a trust income tax return every year. The original owner will need to pay the tax bill even though the income stays in the trust.
IRA assets cannot be part of the trust. If the couple has substantial IRA assets, those may need to be spent to pay for care.
If the original owner needs care in the five years after they create the trust, they will not be eligible for Medicaid due to the lookback period.
The complexity of managing assets through a trust (as opposed to individually) means the legal and accounting fees associated with managing the trust will be higher than those of managing funds individually.
Not all facilities accept Medicaid. Reimbursement rates have not kept up with inflation and the trend (at least anecdotally—no statistics exist that we can find) is that fewer assisted living facilities do each year. (Skilled nursing facilities must accept MA but can limit the number of MA beds.) Recent proposed federal cuts to Medicaid will make this problem worse if enacted. Eligibility means nothing without an available room in a facility that provides quality care.
These risks are hard (perhaps impossible) to quantify. In particular, how does one even begin to anticipate what the federal Medicaid program’s finances (really, the federal government’s finances) will look like in 15 years? How many local facilities will accept Medicaid in 20 years, and what will the quality of care in those facilities look like? How likely is a given client to need care for a period of years?
We have no answers to questions like this. So, our standard recommendation is to tell our clients to retain their assets and not give them away. We know that our clients who have funds available to pay for care will receive good care. We cannot make any guarantees to clients who give funds away intending to rely on whatever care the government provides when the time comes.
Our Bias
We know that our approach to risk is conservative. It protects our clients, perhaps at some risk to the size of the inheritances their children might receive. We also recognize that our risk assessment is ours, and clients are free to make their own assessment. Our role is to make sure these risks are fully understood by clients who choose this route.
We also think that the risk/benefit analysis is more favorable for some clients than for others.
In our view, clients with large retirement accounts ($1M+) are extremely unlikely to use enough money on long term care to receive any benefit from placing their home or other investable assets in an irrevocable trust. An irrevocable trust will add risk and complexity to their finances without any benefit.
Similarly, clients with substantial income from pensions, dividends, or real estate investments are also not a good fit. Between social security and their other income, many clients could pay for assisted living indefinitely without meaningfully reducing their children’s inheritance and will not benefit from an irrevocable trust.
Clients who are trying to protect real estate and have limited other investments are the best fit for irrevocable trusts. If they are willing to take the risk of accepting whatever care the government is willing to pay for, there is a real possibility that an irrevocable trust could increase the amount of their children’s inheritance by protecting a significant real estate asset.
Next Steps
We are happy to discuss irrevocable trust planning as part of creating a new or revised estate plan. We offer a no obligation consultation to clients who are creating a new plan or revising their current plan. For those with asset protection questions only, we offer a consultation as a service on an hourly basis.
To schedule an estate planning or asset protection consultation, please call our office. We look forward to working with you.