This article is for educational purposes only and does not constitute medical, legal, or financial advice. Every family situation is different, and you should consult with appropriate professionals about your specific circumstances.

Irrevocable Trusts — The Medicaid Planning Tool

An irrevocable trust sounds like a legal straightjacket. The word "irrevocable" means you can't undo it or change it later. In a world where circumstances change and people change their minds, the idea of putting your parent's money into something permanent and unchangeable feels backwards. Why would anyone do that on purpose?

The reason is Medicaid. Specifically, the reason is that if your parent is facing long-term care costs, and those costs will be substantial, and your parent's assets aren't large enough to cover those costs indefinitely, then an irrevocable trust can protect some of your parent's wealth from being consumed by care bills. It's a strategy that seems to work against your parent's interests in the short term to protect those interests in the long run.

This is complicated enough that you need a professional to guide it, and I'm going to tell you that upfront. But understanding what an irrevocable trust is, why it exists, and what it might accomplish is important if your parent is facing potential long-term care costs in the coming years.

Understanding Your Parent's Situation

First, assess what your parent actually owns and what your parent's care situation actually looks like. How much money does your parent have in savings and investments? What's the house worth? Does your parent have life insurance? Does your parent have significant personal property? Be realistic about the total.

Next, understand what your parent's health situation suggests. Is your parent healthy and active, or does your parent have health issues that might require professional care? Did a doctor suggest your parent might need long-term care at some point? Is your parent currently managing well at home, or are things deteriorating? The answers to these questions tell you whether long-term care is theoretical or probable in your parent's future.

Does your parent have long-term care insurance? If yes, that changes the entire picture because insurance covers a significant portion of costs. If no, why not? Was it not available or too expensive? Did your parent decline it? Understanding why your parent doesn't have insurance tells you whether your parent actually wants to protect assets or whether your parent is hoping things will work out without planning.

What does your parent actually want to happen to their money? Does your parent care about leaving an inheritance to you, or is your parent focused entirely on making sure their own care is covered? Is your parent willing to accept a lower lifestyle in later years to preserve something for heirs, or does your parent want maximum quality of life regardless of the cost? This is a values question, not a financial question, but it drives all the planning.

Setting Financial Goals

Before you consider an irrevocable trust, you need to know what you're actually trying to accomplish financially. Are you trying to protect all of your parent's assets, or just some? Are you trying to make sure your parent qualifies for Medicaid coverage of nursing home costs, or are you trying to supplement your parent's personal resources? Are you planning for a specific timeframe, like the next three to five years, or planning for a much longer care period?

Calculate how much long-term care actually costs in your area. A nursing home in rural areas costs something very different than a nursing home in a major city. In-home care costs something different than assisted living costs. You need real numbers for your location.

Project how long your parent's money would last if your parent needed full-time care tomorrow. If your parent has $500,000 and care costs $150,000 per year, your parent's money lasts about three years. If care lasts longer than that, you need other funding sources. Insurance, family contribution, or Medicaid become necessary.

Understand what Medicaid would actually cover. In your parent's state, does Medicaid cover nursing home care? Does Medicaid cover assisted living? What are the income limits and asset limits for your parent's state? The rules vary significantly from state to state, and you need state-specific information, not general information.

Identify what resources your family can realistically contribute. Can you afford to help pay for your parent's care? If so, for how long and in what amounts? Can your parent's spouse contribute, or would spousal resources be protected from being spent on your parent's care? Does your parent have other family members who might help? Be realistic about this. Good intentions don't substitute for actual monthly payments.

Building Your Strategy

If your parent has substantial assets and wants to protect them from care costs, an irrevocable trust is one option. Here's how it basically works: your parent transfers assets into the trust. Those assets are no longer your parent's assets legally. Someone else (a trustee) controls them. Your parent loses control of the money, which is the tradeoff for Medicaid purposes. If the assets aren't your parent's property, Medicaid won't count them as your parent's assets when calculating whether your parent qualifies for Medicaid coverage.

There's a catch. Medicaid has a look-back period. In most states, if your parent transferred assets into a trust within the past five years before applying for Medicaid, those assets still count against your parent's eligibility. The idea is to prevent people from just giving away all their money the day before applying for Medicaid. You have to plan ahead.

An irrevocable trust is also irrevocable, which means your parent can't change it or access the money later if your parent changes their mind or if circumstances change. If your parent transfers $200,000 into an irrevocable trust and then circumstances improve and your parent doesn't need long-term care after all, that money is still locked up. It can't come back. Your parent has given up control.

A trustee who isn't your parent controls the money. That trustee could be a professional like a bank, or it could be a family member. But whoever it is makes decisions about the trust's finances. Your parent doesn't get to decide where the money goes.

An irrevocable trust might distribute income to your parent during your parent's lifetime. It might allow your parent to be paid for living expenses. The terms can be structured different ways, but once it's created, you can't change those terms. You're locked into them.

Here's the part that makes this worthwhile: when your parent passes away, the trust assets pass to whoever your parent designated, not into your parent's estate, and likely not through probate. There might be tax advantages depending on how the trust is structured. And if your parent used the trust to protect assets from Medicaid, then those assets are still there for you to inherit rather than being spent on care costs.

Before you consider this route, you need a qualified attorney in your state who understands both estate planning and Medicaid. The rules vary by state. The trusts are complicated to set up. You need someone who knows what they're doing.

Taking Action Now

If your parent is healthy and has no reason to expect long-term care needs, an irrevocable trust is probably not necessary right now. You can revisit it if circumstances change.

If your parent has health issues that suggest long-term care might be necessary in the coming years, talk to an elder law attorney. Not an estate planning attorney, not a tax attorney. An elder law attorney specializes in Medicaid planning and long-term care issues. These are usually local attorneys because Medicaid rules vary by state.

That conversation should cover your parent's specific situation: assets, health, preferences, and what your parent actually wants to accomplish. The attorney can tell you whether an irrevocable trust makes sense or whether other strategies are better.

If you're going to consider an irrevocable trust, don't wait until your parent is already in care and in crisis. The look-back period is five years. If your parent starts planning now and your parent enters a nursing home in three years, the timing works. If your parent waits until being admitted to a nursing home to start planning, it's too late for an irrevocable trust to help.

Your parent also needs to understand the tradeoff. Your parent is giving up control of the money to protect it. That's a significant decision. Your parent needs to be clear that this is actually what your parent wants before proceeding.

If your parent has substantial assets, your parent might also want to think about whether your parent simply wants to self-fund care and not worry about Medicaid at all. If your parent has enough money to cover care for your parent's likely lifespan, protecting assets might not be the priority. Your parent might just want to make sure the rest of the estate is properly structured.

An irrevocable trust isn't the right choice for every family. But if your parent is facing potential long-term care costs and has assets to protect, it's worth understanding how it works and whether it makes sense for your situation.

How To Help Your Elders is an educational resource. We do not provide medical, legal, or financial advice. The information in this article is general in nature and may not apply to your specific situation. If you are concerned about a loved one's cognitive health or safety, consult with their healthcare provider or contact your local Area Agency on Aging for guidance and support.