What to Know About Trusts & How to Protect Your Assets from a Nursing Home

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By: Bill Henry
PublishedFeb 17, 2021
4 minute read

Trusts are designed to protect your assets, but not all trusts are same. You can change some of them after you create them; others you cannot. In this article, you’ll discover ways to protect your assets – like your home and your nest egg – in the event you need expensive nursing home care.

Estate planning attorney Bill Henry shares six things you should know about trusts and how to protect your assets.

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6 Things to Know About Trusts 
& How to Protect Your Assets

There are basically six things you need to know about trusts and protecting your assets from the devastating costs of nursing home care.

Let’s start with revocable trusts versus irrevocable trusts.

What’s The Difference?

Revocable Trusts are Flexible

A revocable trust allows you to change the terms of the trust. It’s the one most people choose when they’re setting up a trust.

A revocable trust is one where you reserve the rights to change the terms of the trust. Most people we see who have a trust, have a revocable trust.

So how do you know if you have a revocable trust? One of the best ways to find out is to look at its terms.

If your trust says something like the grantor or trustor (that refers to you) reserves the right to change or terminate or amend this trust, you have a revocable trust.

Irrevocable Trusts are Inalterable

The terms of an irrevocable trust cannot be changed.

Create a Treasure Chest

Think about the trust as a treasure chest. You can put your property in the treasure chest to keep it safe.

If it’s a revocable trust, the lid on the chest remains open. That allows you to take the assets back out.

If you choose to have an irrevocable trust, once the lid is closed there is no going back. You give up your rights to take that money back out.

How a Trust Can Protect Your Assets

Let’s delve into how a trust can, or cannot, protect your assets from the nursing home.

You may think that because you have a trust, you are protected from the nursing or assisted living facility from taking those assets.

Revocable Trusts & Medicaid

If you have a revocable trust, your assets will not be protected from the nursing home. If the trust is revocable, it will be included in your estate.

You will have to pay that money over to the nursing home in order for the government, through Medicaid, to pick up that bill.

If you try to get around that, you might actually make the situation worse.

Say you decide to take your money out of the the trust and give it to your kids. If you do that, you trip what’s called a penalty period. 

When you apply for Medicaid, the government will look back five years to see if you transferred, or gifted or sold, any assets. If that transfer was made during that five-year look back period, you will be penalized for it.

That means, you will have to find a way to pay for some of your nursing home costs – could be months, could be years.

How long you have to pay for nursing home care due to a penalty depends on the amount of money that was transferred.

Calculating the Penalty

To find out how long you will have to pay for the nursing home, you first add up how much you transferred. Then, take that total amount and divide it by Colorado’s penalty divisor. As of September 2020, the state’s penalty divisor is $8,758 a month.

Let’s look at an example:

Let’s say you transferred $50,000 from your revocable trust to your son. That transfer took place during the time period that Medicaid reviews whether you sold or transferred assets to try to avoid paying for nursing home care.

In this case, you would divide $50,000 by $8,758. You get 5.7.

So 5.7 is the number of months you would have to pay for the nursing home out of pocket before Medicaid can kick in.

Revocable Trust Takeaway

A revocable trust offers some flexibility, but it will not protect your assets from a nursing home.

The American Council on Aging provides terrific information about this topic if you would like to read more about it.

Irrevocable Trusts & Medicaid

Let’s turn to irrevocable trusts. Let’s say that you put your assets into an irrevocable trust. When you did that, you closed the lid to the treasure chest, and you gave up your right to get access to that money.

What if you give somebody else the right to get the money from the irrevocable trust for you?

Now, that individual can decide if you get the money, even though you have no rights to it. In this scenario they can still get the money and give it to you.

This is NOT a Medicaid Work Around 

Unfortunately, while that may seem like a clever work around, that money given to you will be included in your estate. It’s not protected from the nursing home. So, that doesn’t help you either.

A Monthly Allowance from an Irrevocable Trust

If you receive a monthly allowance from an irrevocable trust, then just that income, that allowance, will be included in terms of your qualification for Medicaid.

That monthly income will also be included in the decision as to whether and to what extent you will have to pay money over to the nursing home.

Other Considerations

Many people wonder, if I transfer money into an irrevocable trust that I have no rights to, how long do I have to wait before that money is no longer counted against me. The answer may surprise you. It’s 60 months. That’s five years. With that in mind, you should carefully consider what kind of trust you choose.

Other Types of Trusts 

As you can see, revocable and irrevocable trusts have their pros and cons. You may decide neither one is right for you. There are other types of trust options you might explore.

For instance, there are pooled trusts, disability trusts, and income trusts.

If you’re interested in setting up a trust but you aren’t sure what’s the best choice for you, one of the attorneys on our Estate Planning and Elder Law Team can walk you though the possibilities.

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