The question of protecting assets while planning for potential long-term care needs, specifically concerning Medicaid payback, is a common concern for many families in San Diego and beyond. A properly structured third-party trust can indeed be a valuable tool in achieving this goal, but it’s crucial to understand the intricacies involved. Medicaid, a needs-based program, often requires recovery of assets from an individual’s estate after their death to recoup funds spent on their care. This recovery process, known as “Medicaid payback” or estate recovery, can significantly diminish what’s left for heirs. However, assets held within an *irrevocable* third-party trust are generally shielded from this recovery, as the individual never legally owned those assets directly.
What are the key differences between revocable and irrevocable trusts?
Understanding the distinction between revocable and irrevocable trusts is foundational. A revocable trust, while offering some estate planning benefits, does *not* protect assets from Medicaid recovery. This is because the grantor (the person creating the trust) retains control over the assets and can access them during their lifetime. Conversely, an irrevocable trust, once established, relinquishes control to the trustee, meaning the grantor cannot easily modify or revoke it. This loss of access and control is what provides the protection from Medicaid’s estate recovery claims. According to the Kaiser Family Foundation, in 2020, states recovered over $3.7 billion through Medicaid estate recovery programs, highlighting the importance of proactive planning. This figure is projected to increase with the aging population.
How far back does Medicaid look for assets?
The “look-back period” is a critical concept when considering Medicaid eligibility. Currently, most states have a five-year look-back period, meaning Medicaid will scrutinize financial transactions made within those five years before the application date. Any gifts or transfers of assets made during this period could result in a period of ineligibility for Medicaid benefits. A third-party trust established *more than five years* before a Medicaid application can avoid triggering this penalty period. However, the assets transferred into the trust must be genuinely accessible to the trustee, and the trust document must be carefully drafted to comply with Medicaid regulations. A common misstep is creating a trust that appears to be a “self-settled” trust, which Medicaid *will* count towards the asset total. It’s estimated that around 12% of Medicaid applicants are initially denied due to improper asset transfers.
I knew a woman named Eleanor who didn’t plan ahead…
I recall a client, Eleanor, a vibrant artist in her late seventies, who postponed estate planning for years. She believed she had plenty of time, and the idea of confronting her mortality felt unpleasant. Unfortunately, she suffered a stroke and required extensive nursing home care. When she applied for Medicaid, it was discovered that just three years prior, she had gifted a substantial sum of money to her son to help with a down payment on a house. Because this gift fell within the five-year look-back period, she was penalized with a period of ineligibility, forcing her to privately fund her care until the penalty expired. This put a tremendous financial strain on her family and depleted a significant portion of her savings. It was a difficult situation that could have been easily avoided with proactive planning.
But working with a San Diego attorney saved the Peterson family…
On a brighter note, I assisted the Peterson family in establishing a third-party trust years ago. Mr. Peterson, a retired engineer, was concerned about the potential cost of long-term care and wanted to protect assets for his grandchildren. We created an irrevocable trust, funded with a portion of his investment portfolio. When Mrs. Peterson needed skilled nursing care, the assets held within the trust were protected from Medicaid recovery. This allowed her to receive the care she needed without depleting the funds intended for her grandchildren’s education. The family was incredibly grateful, and it reinforced the value of proactive planning. The Peterson’s story exemplifies how a well-crafted trust can provide peace of mind and secure a family’s financial future. It’s about more than just avoiding Medicaid payback; it’s about ensuring that loved ones are cared for and that future generations are provided for.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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