You'll hear a Medicaid Asset Protection Trust described in various ways: "Medicaid Five Year Trust," "Irrevocable Five Year Trust" or a "Medicaid Irrevocable Trust." All of these terms refer to a type of irrevocable trust in Florida that it utilized to pre-plan in anticipation of applying for VA or Medicaid long-term care benefits in the future - i.e. five years or more in the future.
What is a Medicaid Irrevocable 5 Year Trust in Florida?
An irrevocable trust in Florida is a trust that, with several exceptions, cannot be changed or revoked after it has been created. The person establishing a Medicaid Irrevocable Trust in Florida is referred to as the "grantor," "settlor," or, less commonly, "trustor."
In a Irrevocable Medicaid Asset Protection Trust context, the grantor is going to be the eventual Medicaid applicant and his or her spouse.
The Medicaid Irrevocable Asset Protection Trust & 5-Year Lookback Period
The grantor / eventual medicaid applicant places a substantial portion (usually not all) of their assets into the Medicaid Irrevocable Trust to take advantage of the five year lookback period.
If they do not need, or can privately pay for most of their long-term care needs within five years of utilizing the Medicaid Irrevocable 5 year trust, the assets placed in the trust will not be included in the Medicaid ICP or Medicaid Waiver (Home and Community Based Services) eligibility calculation -after the five-year look back period has elapsed.
Who Can be Trustee of a Medicaid Asset Protection Trust?
The grantor or settlor names one or several trustees - i.e. people who are in charge of managing the Medicaid Irrevocable Trust.
The only two people in the world who are absolutely forbidden to act as trustee of a Medicaid Asset Protection Trust are, in fact, the settlor (and the settlor's spouse). This is because the trustee holds legal title to the assets on behalf of the trust and for the benefit of others. Because the trustee has the ability to control and access the assets within the trust, if the eventual medicaid applicant were a trustee, then all assets they have access to would count against them when Medicaid is calculating eligibility.
Who Can be a Beneficiary of Assets Held Within a Medicaid Asset Protection Trust?
The grantor or settlor names one or several beneficiaries for the assets placed within the trust - i.e. people who can benefit or receive distributions from the irrevocable five year trust now - or who will benefit from the medicaid asset protection trust upon the settlor (and spouse) passing away.
The only two people in the world who are absolutely forbidden to be named as beneficiary of the medicaid asset protection trust's assets are, in fact, the settlor (and the settlor's spouse). The reason is the same as above, whatever they are entitled to is counted against them. An exception to this rule is that the grantor (and their spouse) may continue to live in real estate placed inside the five year irrevocable trust.
In other words, if the eventual medicaid applicant (and their spouse) were able to directly receive distributions from the assets from the medicaid five year trust, then the assets would count against the Medicaid applicant for eligibility qualification, which would run counter to the entire purpose of utilizing the five year trust in the first place.
However, the grantor retains the right to replace the trustees (for any reason if the grantor feels that the trust is not being managed properly) and direct the trustee(s) to make distributions to the beneficiaries (usually the grantor's children) named in the five year medicaid trust. The beneficiaries can use such distributions for any purpose including assisting their parents with their own needs if they so choose. But, on the other hand, beneficiaries cannot be required to assist their parents. The grantor can change beneficiaries if they so choose as well.
Who Can be a Beneficiary of Income Produced by the Irrevocable Medicaid Five Year Trust?
The eventual medicaid applicant / grantor and his or her spouse may receive all income derived from the irrevocable five year trust. Income is the only direct benefit from the Medicaid asset protection trust that the settlor (or their spouse) can derive. This income will be counted against them for eligibility purposes, and could necessitate utilizing a Medicaid Income Trust (a/k/a qualified income trust or miller trust).
Utilizing a Medicaid Five Year Trust is made more palatable because the grantor retains access to their income, which they use to manage their everyday lives.
What If The Grantor Needs Medicaid Within Five Years?
Certainly, we have to consider the possibility of a sudden or unexpected health crises. Many of my clients are concerned about what would happen if they need Medicaid in two three of four years?
First, my advice would be different on a case-by-case basis. If, for example, only a year had passed, and my client had a sudden stroke that required skilled nursing home care, I would then likely advise dissolving the trust. If the grantor, trustee and beneficiary agree - there are mechanisms that will allow the irrevocable trust to be revoked. Of course, then the assets would be returned to the eventual medicaid applicant and alternative medicaid planning strategies (of which there are plenty) would need to be utilized.
If, on the other hand, four years and ten months had passed, and my client simply needed home health care hours, I might encourage the beneficiaries (usually my client's children) to privately pay for their parent's care for two months to run down the clock. Every situation is different, but there are always solutions.
Does Medicaid Have a Right to Recover from Assets Within the Five Year Trust after the Grantor Passes Away?
No! This is one of the best features of the five year irrevocable medicaid trust. You can have your cake and eat it too. Medicaid estate recovery refers to the process by which medicaid places a lien on the estate of those who are Medicaid recipients after they pass away. However, part of our Medicaid planning seeks to minimize (usually eliminate) assets that pass through probate. Remember that an irrevocable trust is its own separate legal entity. Medicaid / DCF / AHCA has no "jurisdiction" over the trust and it does not go through the Florida probate process.
Instead of Using a Five Year Irrevocable Trust, why Not Just Give the Assets Away to My Children
This instinct is a natural one. Clients often say, I want my children to get my assets anyway, why not just give it to them in advance of my passing away? Then, assuming I don't need Medicaid in five years, I'll be eligible.
This, by the way is all technically true and valid. Gifting assets out of an eventual medicaid applicant's name results in the same penalty and follows the same five year timeline whether the gift is made to a person or a trust. But there are a few reasons why outright gifts to your children may not be a good idea:
- What if your child gets divorced? Now 1/2 of your gift goes to their ex-spouse.
- What if your child causes a car accident, gets sued, has debt or has to declare bankruptcy? Your gift becomes available to, and subject to attachment by, your child's creditors.
- What if your child has addiction or gambling issues or is simply financially irresponsible? Again, the windfall they receive in the form of your outright gift becomes their money to do with what they please.
- What if your child passes away? Then the money you gifted becomes subject to their estate plan. If they died intestate, or are unmarried and have no kids, their estate plan may result in money coming back to you, which could jeopardize Medicaid eligibility. Or, perhaps they are married. Very likely their estate plan says that their (your) assets go to their spouse upon their passing.