Irrevocable Trust Setup for Medicaid Planning

Planning for long-term care while preserving assets can be a complex process. One effective strategy is setting up an irrevocable trust for Medicaid planning to protect your wealth and ensure eligibility for Medicaid benefits. Proper trust structuring can help shield assets from Medicaid's spend-down requirements while allowing you to qualify for essential care services.

If you're considering an irrevocable Medicaid trust, working with an experienced estate planning attorney is crucial. Contact us by using our online form or calling 414-253-8500 for legal assistance.

What Is an Irrevocable Trust for Medicaid Planning?

An irrevocable Medicaid trust is a type of trust designed to protect assets from being counted as part of your estate when applying for Medicaid benefits. Unlike a revocable trust, which allows you to retain control over assets, an irrevocable trust permanently transfers assets out of your ownership.

Key Features of an Irrevocable Medicaid Trust:

Asset Protection - Assets in the trust are no longer considered yours for Medicaid eligibility purposes.
Medicaid Qualification - Helps you meet Medicaid's strict income and asset limits.
Five-Year Lookback Rule - Transfers to the trust must be made at least five years before applying for Medicaid to avoid penalties.
Limited Access - You may receive income generated by the trust but cannot access the principal.
Estate Planning Benefits - Assets in the trust can be passed to beneficiaries, avoiding probate.

Key Differences Between Irrevocable and Revocable Trusts

Feature	Irrevocable Medicaid Trust	Revocable Living Trust
Control Over Assets	Limited (cannot modify or revoke)	Full control (can modify or revoke)
Medicaid Eligibility	Assets not counted after 5-year lookback	Assets count toward Medicaid eligibility
Asset Protection	High - Protects assets from Medicaid and creditors	Low - Assets still considered part of the estate
Probate Avoidance	Yes	Yes
Estate Tax Benefits	May reduce taxable estate	No estate tax benefits
Access to Assets	Grantor cannot access principal	Full access during lifetime
Best For	Protecting assets while qualifying for Medicaid	Avoiding probate but maintaining access to assets

Why Use an Irrevocable Trust for Medicaid Planning?

Medicaid has strict financial eligibility rules, requiring individuals to spend down assets before qualifying for long-term care coverage. Without proper planning, you may be forced to deplete your savings before Medicaid will cover nursing home or home care expenses.

Benefits of an Irrevocable Medicaid Trust:

Preserves Wealth - Protects assets for your heirs rather than spending them on long-term care costs.
Avoids Medicaid Estate Recovery - Prevents Medicaid from reclaiming costs from your estate after death.
Maintains Eligibility - Helps you qualify for Medicaid benefits without depleting your assets.
Potential Tax Advantages - Can provide tax benefits depending on how the trust is structured.

How to Set Up an Irrevocable Medicaid Trust

Setting up an irrevocable trust for Medicaid planning requires careful legal and financial planning. Here are the key steps involved:

1. Determine Your Goals

Before creating a trust, consider:

How much of your assets you want to protect.
Your long-term care needs and Medicaid eligibility timeline.
Your intentions for passing assets to heirs.

2. Choose a Trustee

Since you cannot act as the trustee, you must appoint someone to manage the trust. Options include:

A trusted family member (such as an adult child).
A professional trustee (such as an attorney or financial institution).

3. Fund the Trust

Assets commonly transferred into an irrevocable Medicaid trust include:

Real estate (family home, rental properties).
Cash and bank accounts (savings, CDs, money market funds).
Investments (stocks, bonds, mutual funds).
Life insurance policies (depending on state rules).

4. Comply with the Five-Year Lookback Rule

Medicaid reviews asset transfers within five years of your application. If you transfer assets to a trust within this period, penalties may delay Medicaid eligibility. Planning ahead is essential.

5. Work with an Attorney to Draft the Trust

A properly structured irrevocable Medicaid trust must meet state-specific Medicaid requirements. A Medicaid planning attorney ensures compliance and tailors the trust to your needs.

What Assets Should Not Be Placed in an Irrevocable Medicaid Trust?

While an irrevocable trust can protect many assets, certain types should not be transferred into the trust due to legal and financial implications.

Assets to Avoid Placing in the Trust:

Retirement Accounts (401(k), IRA, Roth IRA) - These accounts must remain in your name to maintain tax-deferred status. Instead, consider withdrawing funds and placing cash proceeds into the trust.
Vehicles - Medicaid typically allows applicants to keep one vehicle, and placing it in a trust may complicate ownership and usage.
Personal Belongings - Household items, jewelry, and furniture do not impact Medicaid eligibility and should not be placed in the trust.
Prepaid Funeral Plans - Medicaid allows irrevocable prepaid funeral arrangements, so placing them in a trust is unnecessary.
Annuities with an Owner Designation - Some annuities are Medicaid-compliant, but transferring them into a trust may cause tax consequences or Medicaid disqualification.

Common Misconceptions About Medicaid Trusts

Many people have misconceptions about irrevocable Medicaid trusts and how they work. Here are some common myths debunked:

Myth 1: You Lose Everything When You Create a Trust

While you give up direct control over assets in the trust, you can still receive income generated by trust assets (if structured correctly) and designate beneficiaries who will inherit them.

Myth 2: You Can Transfer Assets to a Trust Right Before Applying for Medicaid

Medicaid's five-year lookback rule prevents last-minute transfers. If assets are moved into a trust within five years of applying, Medicaid will impose a penalty period delaying benefits.

Myth 3: Trusts Are Only for the Wealthy

Even middle-class families can benefit from an irrevocable Medicaid trust to protect a home, savings, and other assets from long-term care costs.

Myth 4: You Can Change the Trust Later If Needed

Once an irrevocable trust is established, you cannot modify or revoke it, making it essential to plan carefully before creating one.

How an Irrevocable Medicaid Trust Affects Taxes

Income Tax Considerations

The trust itself is usually considered a grantor trust, meaning income is taxed to the person who created it.
If structured as a non-grantor trust, the trust pays its own taxes, potentially at higher tax rates.

Capital Gains Tax Benefits

If you place your home in the trust, it may still qualify for a step-up in basis upon death, reducing capital gains tax for heirs.
Medicaid asset transfers outside of a trust can create capital gains tax burdens for beneficiaries, making a trust a better option.

Estate and Gift Tax Implications

Assets placed in an irrevocable Medicaid trust are removed from your estate, potentially reducing estate tax liability.
Some trusts are structured to minimize gift tax exposure when transferring assets.

Comparing an Irrevocable Medicaid Trust to Other Estate Planning Tools

An irrevocable trust is just one option for Medicaid and estate planning. Understanding how it compares to other tools can help determine the best strategy.

Estate Planning Tool	Asset Protection	Medicaid Eligibility	Control Over Assets	Probate Avoidance
Irrevocable Medicaid Trust	High	Yes, after 5-year lookback	Limited (cannot revoke)	Yes
Revocable Living Trust	Low	No (assets count for Medicaid)	Full	Yes
Life Estate Deed	Moderate	Yes, if properly structured	Limited (retains right to live in home)	Yes
Gifting Assets to Family	Moderate	No (subject to Medicaid penalties)	None	No (if done properly)

Who Should Consider an Irrevocable Medicaid Trust?

Setting up an irrevocable Medicaid trust may be a good option if you:

✅ Own a home or other valuable assets you want to protect from Medicaid's spend-down rules.

✅ Are five or more years away from potentially needing Medicaid benefits.

✅ Want to qualify for Medicaid while preserving assets for your children or loved ones.

✅ Prefer to avoid probate and ensure smooth asset transfer to beneficiaries.

✅ Are concerned about Medicaid estate recovery after your passing.

Contact an Attorney for Medicaid Trust Planning

Setting up an irrevocable Medicaid trust is a complex process requiring careful planning to comply with Medicaid rules while protecting your assets. At Heritage Law Office, we help clients create customized estate plans that meet their needs and secure their financial future.

📞 Call us at 414-253-8500 or contact us online to schedule a consultation.

Frequently Asked Questions (FAQs)

1. What is the five-year lookback rule for Medicaid trusts?

The five-year lookback rule means that Medicaid examines all financial transactions made within the five years before applying for benefits. If assets were transferred to an irrevocable trust during this period, Medicaid may impose a penalty delaying eligibility. To avoid penalties, assets should be transferred well before needing long-term care.

2. Can I still live in my home if I transfer it to an irrevocable Medicaid trust?

Yes, in many cases, you can continue living in your home after transferring it to an irrevocable Medicaid trust. However, you will no longer legally own the home, and decisions regarding its sale or management will be controlled by the trustee. This arrangement ensures that the home is protected from Medicaid recovery while allowing you to reside there.

3. Does an irrevocable Medicaid trust affect my taxes?

An irrevocable Medicaid trust can have tax benefits, such as preserving the step-up in basis for capital gains tax purposes when heirs inherit property. However, income generated by trust assets may still be taxable, either to the trust or to the grantor, depending on how the trust is structured. Consulting a Medicaid planning attorney can help ensure tax efficiency.

4. Can I change beneficiaries of an irrevocable Medicaid trust?

Once an irrevocable trust is established, you generally cannot change beneficiaries unless the trust includes provisions allowing limited modifications. Some trusts include a trust protector who has authority to adjust beneficiaries under certain conditions. Since these trusts are designed to be permanent, careful planning is essential before setting one up.

5. What happens to assets in an irrevocable Medicaid trust after I pass away?

After your passing, assets in the irrevocable Medicaid trust are distributed to the named beneficiaries without going through probate. This ensures a smooth transfer of wealth while protecting the assets from Medicaid estate recovery. The trustee is responsible for managing and distributing the assets according to the terms outlined in the trust.