Understanding the rules of the irrevocable trust and who can access the trust can be complicated. Here are some rules to keep in mind.
July 22, 2024 Home > Blog > What Trustees Need to Know About Irrevocable Medicaid Asset Protection TrustsNo, the assets of the trust are not available to your mom. The irrevocable trust was created to protect assets from being counted for eligibility purposes when applying for Medicaid services. If the principal is available to her, then it is available to pay for her care.
The need to apply for Medicaid arises when someone is seeking assistance with the cost of home care services or long-term nursing home care. Unlike Medicare, Medicaid has limits on the amount of assets and income an applicant can have. Creating an irrevocable trust and transferring assets to that trust is a tool that can be utilized to achieve this eligibility.
The creating and funding of a trust is only the first step. Serving as trustee is an important role and understanding the rules of the game are crucial to successfully carrying out your responsibilities. The trustee has a fiduciary duty to preserve the trust assets and act only in accordance with the powers contained in the trust. It is imperative that the Trustee know the terms of the trust and be fully familiar with his or her responsibilities. In general, there are certain items that you will find in virtually all trusts created for this purpose. The number one rule is that trust principal cannot be distributed to the grantor of the trust. This means that if mom created the trust, she can only receive income, do not give her principal or pay her bills.
What is the trust principal? The assets of the trust are the principal. This can be distinguished from the trust income, such as the interest and dividends earned from trust investments, or rents received from real property owned by the trust. On the other hand, principal is the stock itself, the bank account balance, or the real property.
The trustee is a “fiduciary” and is responsible for maintaining trust assets in accordance with the law and in accordance with the terms of the trust document. Running afoul of either will “bust” the trust, resulting in the trust assets being completely countable when applying for Medicaid. The improper use of assets in the busted trust will come to light when applying for Medicaid. While there is currently no lookback for homecare Medicaid, there is a 5-year lookback for nursing home coverage. This lookback requires that you provide statements for each trust account for the 5 years prior requesting Medicaid reimbursement. The trustee also has an obligation to account to all the other beneficiaries after the grantor’s death.
Typically, the principal is available to other lifetime beneficiaries of the trust. However, the Trustee must be very careful to follow the provisions of the trust to avoid personal liability. Exercise caution before distributing any principal assets from the trust. Understanding the rules of the irrevocable trust and who can access the trust is complicated and requires counseling from a qualified trusts and estates or elder law attorney.