The simple answer to the question above is no.  A living trust accomplishes a lot of things, but protecting assets from long term medical care costs, or costs associated with a nursing home is not one of the things that a living trust can do.  A living trust helps avoid the probate process, streamlines the process after you have passed away, and can help your survivors have less work to do, but a living trust does not protect against creditors or long term care medical costs.

When trying to protect assets from long term care medical costs, you need to consider the timing of putting protections in place and the rules of the programs that can pay for your long term medical costs.  Medicaid is the largest, and most well known program that pays for long term care, so many of the planning options are driven by Medicaid rules.  Medicaid has strict rules on transferring assets and how long the transferred assets will still be a problem for you, even after you transfer them out of your name.

You can use an irrevocable trust to protect your assets, but the irrevocable trust needs to create the proper degree of separation of you from your assets, so you need to consider the necessary trade-offs for setting up an irrevocable trust.  You can get asset protection, but there is no magic solution to suddenly qualify for government long term care payment programs, and a living trust does not provide the necessary protection.

 

Medicaid Rule and Restrictions on Transferring Assets

Medicaid has some very strict rules on transferring assets out of your name.  If you transfer assets out of your name and do not receive the full fair market value of an assets in return – in the form of payment or services rendered (like medical care or rent) – then Medicaid will count those assets against you for 5 years.

This means that if you transfer assets, or give them away, and you apply for Medicaid within 5 years of doing so, then Medicaid will look back at what you gave away during the past 5 years, and will count the value of those assets against you.  You could be disqualified from receiving any Medicaid assistance for the time frame in which you could have used those assets to pay for your own long term care.  This set of rules is referred to as the 5 year look back period / rule, since Medicaid will look back 5 years prior to your Medicaid application in search of gifts or transfers for less than full fair market value.  Ideally, if you are trying to protect assets from long term care costs, you would want to transfer them out of your name more than 5 years before you apply for Medicaid to pay for your long term care.

As with any rule, there are exceptions.  If a child lives in the house with a parent for 2 years, and cares for the parent in a similar manner to what would be available in a nursing home, then the house may be transferred to the child without being subject to the 5 year look back period.  This can be most useful and helpful if a child is available to help care for a parent, and the idea here is that a child caring for the aging parent at home will help keep the parent out of a nursing home, so the child can be rewarded with the house for doing so.  This is one exception, and there are a couple of other limited exceptions, but most assets are subject to the 5 year look back time period.

 

You Can Protect Your Asset with an Irrevocable Trust

You can place your assets into an irrevocable asset protection trust to start the 5 year clock prior to your need to go into a nursing home and have Medicaid pay for long term care.  In doing so, you create a legal wall of separation between you and your assets.  When you put the assets into an irrevocable trust, you no longer control the assets, and you can no longer be a direct beneficiary of the assets.  Most often, I will have clients name their children as trustee of the trust and use their children as beneficiaries of the trust.  In doing so, the children are now in charge of the assets, and if assets need to be pulled out of the trust, then the children are the people who can make that happen, not the parent who sets up the trust.  This type of arrangement separates out the assets from the individual, and starts the clock on the 5 years when the assets are placed in the irrevocable asset protection trust.  Of course, since you have given up control of the assets, this is quite the trade off.

You don’t want to transfer control of assets too early, and lose control too early, but you also don’t want to transfer assets too late, and then need to pay for your own care out of your own pocket, so there is not one perfect time  to set up an irrevocable trust.  An irrevocable assets protection trust also cannot be changed without court permission, so it is not something to be created lightly.  To protect assets from Medicaid or long term care costs, you need to be separated from your assets – and no longer be the owner.  The irrevocable assets protection trust creates the necessary degree of separation for assets.  An irrevocable trust means you are no longer the owner of the assets and that you cannot change it back to you being the asset’s owner.

While a useful and helpful tool, irrevocable asset protection trusts aren’t the correct solution for everyone.  You can transfer assets directly to your children, but then the assets are subject to any of the children’s creditors and the 5 year look back period still applies.  Unfortunately, there is no magic trust or method that would allow you to transfer assets out of your name and qualify for Medicaid assistance with long term care immediately.  That would be a really neat setup, but since it doesn’t exist, you want to carefully consider the timing involved in your situation and whether a trust would be helpful and worth the cost.

Setting up an Irrevocable Asset Protection Trust is Best Done with a Professional

While it is true that you could set up your own asset protection trust, setting up a trust that complies with all the necessary Medicaid, IRS, VA, and Colorado state law rules is usually best handled by an experienced estate planning attorney who can help you navigate the complex rules involved.  A living trust is not enough, and knowing the differences between how a living trust works and how an irrevocable trust can provide asset protection is part of the reason you want to work with an experienced estate planning attorney to set up an irrevocable asset protection trust.  If you think this type of trust might help you, please click the link below to schedule an appointment below.