Erin L. Nunes, Esq., Managing Partner
For many individuals and families, an Irrevocable Trust (IRT) is a crucial component of a comprehensive elder law plan, particularly for protecting assets while planning for potential long-term care needs and Medicaid eligibility. A common concern, however, is how to access funds from an IRT without jeopardizing Medicaid eligibility, especially given the strict “look-back” period. In Massachusetts, Medicaid is also referred to as MassHealth.
Understanding the Medicaid Look-Back Period and Irrevocable Trusts
Medicaid, a needs-based program that can cover long-term care costs, has a “look-back” period (currently 60 months in most states, including Massachusetts). This means that when you apply for Medicaid, the state can review all financial transactions made within the five years before your application date. If assets were transferred for less than fair market value during this period, a penalty period of ineligibility for Medicaid benefits may be imposed.
The very purpose of an Irrevocable Trust in Medicaid planning is to remove assets from your ownership so they are not counted for Medicaid eligibility purposes. To achieve this, the assets must be transferred to the IRT outside of the look-back period. If assets are transferred into an IRT within this 60-month window, they will likely be considered an uncompensated transfer and trigger a penalty.
Key Principle: The Grantor’s Lack of Control
The fundamental characteristic of an Irrevocable Trust, from a Medicaid perspective, is that the person who creates and funds the trust (the “grantor”) gives up control and access to the principal (the assets themselves). This lack of control is what makes the assets “unavailable” for Medicaid purposes.
Therefore, directly “taking money” from the principal of an Irrevocable Trust by the grantor will negate the trust’s asset protection for Medicaid purposes, and subject the trust assets to the cost of the grantor’s care. If the grantor retains the right to access the principal, Medicaid will consider the principal to be an available resource, even if it’s held within the trust.
Limited Scenarios for Accessing Trust Funds Without Affecting Medicaid Eligibility (for the Grantor):
While the grantor generally cannot access the principal of an IRT without adverse Medicaid consequences, there are very limited situations or specific trust provisions that might allow for some form of benefit without affecting the look-back period or eligibility, assuming the trust was properly established and funded outside the look-back period:
Distributions to Third-Party Beneficiaries (Not the Grantor):
An Irrevocable Trust can permit the trustee to make distributions of principal to other beneficiaries (e.g., children or grandchildren) without affecting the grantor’s Medicaid look-back period, provided the grantor has no control over these distributions and cannot compel them for their own benefit. These distributions are effectively gifts made by the trust, not the grantor, and as long as the trust was established and funded outside the look-back period, these distributions from the trust’s principal generally do not create a new penalty period for the grantor.
What Does NOT Work (and will trigger a penalty):
- Grantor Retaining Any Power Over Principal: Any provision in the trust that allows the grantor to revoke the trust, or access the principal will cause the assets to be counted for Medicaid purposes.
- If the Trustee has any discretion to use trust principal for the benefit of the grantor, that will cause assets to be counted for Medicaid purposes.
- “Borrowing” from the Trust: Any loan from the trust to the grantor, unless it is a legitimate, arms-length transaction with fair market value repayment terms, could be deemed access to principal.
Crucial Considerations:
- Early Planning is Paramount: The most effective way to use an Irrevocable Trust for Medicaid planning is to establish and fund it well in advance of any potential need for long-term care – ideally, more than five years before a Medicaid application.
- No Access to Principal by Grantor: If asset protection for Medicaid is the goal, the grantor must irrevocably relinquish control and access to the principal of the trust. This is a significant decision and must be fully understood before creating an IRT.
- State-Specific Rules: Medicaid rules vary by state. What might be permissible in one state could be a disqualifying transfer in another.
- Professional Guidance is Essential: Navigating the complexities of Irrevocable Trusts and Medicaid eligibility requires the expertise of an experienced elder law attorney. Attempting to manage an IRT without professional guidance can lead to costly mistakes and unintended disqualification from vital benefits.
In summary, the concept of “taking money” from an Irrevocable Trust by the grantor while seeking Medicaid eligibility is fundamentally at odds with the trust’s purpose. The value of an IRT in elder law planning lies in its ability to shield assets by making them unavailable to the grantor, thereby ensuring they are not counted for Medicaid purposes, provided the rigorous look-back period rules are observed.
©Surprenant & Beneski, P.C. 35 Arnold Street, New Bedford, MA 02740, 336 South Street, Hyannis MA 02601 and 45 Bristol Drive, Easton MA 02375. This article is for illustration purposes only. This article does not constitute legal advice. There is no attorney/client relationship created with Surprenant & Beneski, P.C. by this article. DO NOT make decisions based upon information in this article. Every family is unique and legal advice can only be given after an individual consultation with an elder law attorney. Any decisions made without proper legal advice may cause significant legal and financial problems.
