Myth Busting: All Trusts Protect Against Long-Term Care Costs

Myth busting isn’t just for blowing things up or smashing objects together. We at Borchers Trust Law have taken on the challenge to bust some common misconceptions related to estate planning. The first myth to bust is that many people believe that ALL trusts, even revocable trusts, protect against long-term care costs. Here’s an example of a client interaction that I had that highlights this misperception.

I sat across from our client Joe at his kitchen table. We discussed the process to qualify his wife for MassHealth benefits, which would pay for her nursing home care. He was distraught over her recent decline in health, but was encouraged by the legal planning they had done many years earlier with another law firm to protect against this very scenario.

Joe and his wife had established a trust more than seven years ago. As he relaxed a bit in his chair, he remarked, “…and so our assets are protected from the nursing home.” He then shared his “real” concern about the thousands of dollars apparently stashed away in the flour jar on the counter behind us.

As we dove a bit deeper into the details, it turns out that many of their assets were held in a revocable trust. While time-wise they were beyond the infamous five-year lookback period, planning-wise they had done so with the wrong type of trust! As a result – at least as far as nursing home payment purposes are concerned – it was as if the trust planning had never been done. Everything in the trust was exposed to be spent on his wife’s long-term care, which was not their intent by any means.

Long-Term Care: Irrevocable vs. Revocable Trusts

What did Joe and his wife do wrong? After all, isn’t a trust one of the best ways to beat the five-year lookback and preserve funds from the high price tag of long-term care? To successfully execute this planning strategy, an irrevocable trust is necessary. In other words, you need to put in place an agreement whereby rights over property are totally relinquished and you cannot later change your mind.

When MassHealth (Medicaid in Massachusetts) reviews a trust, they compare it against the “any circumstances” test. They want to know whether there are any circumstances provided in the trust arrangement that would allow the trustee to distribute trust property back to its creator (grantor). If so, then the entire trust is counted and available for use toward care costs, thereby squashing eligibility for Medicaid benefits. With a revocable trust, there are not just “any” but “many” circumstances in which the trust can be accessed by the grantor.

Just as the name implies, a revocable trust is written to allow its creator to revoke it, and therefore grants full access to its contents. It’s like creating a coffee mug (“the trust”) and filling it with freshly brewed coffee (“trust property”) and then deciding you’d like to take that coffee back sip by sip (“trust distribution”). Are there any circumstances in which you can drink the coffee you poured into the mug? With a revocable trust, the answer is always “yes,” since access, control, and the ability to change one’s mind are inherent in the plan. Accordingly, it is a poor choice to protect assetsThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More.

On the other hand, an irrevocable trust, if written correctly, will empower and mandate that a trustee withhold trust assets from the grantor, who retains no rights over the property transferred and no right to later change the terms. A properly drafted irrevocable trust does not allow any circumstances in which trust funds can go back to the trust creator. And so that warm, freshly brewed coffee will have to be enjoyed by someone else!

The grantor’s beneficiaries may immediately enjoy the trust, while the grantor is excluded. That is not to say, however, that the beneficiary is prevented from applying what is now their asset to help a family member, including the grantor.

Qualifying for MassHealth

When I explained all of this to Joe, his confidence evaporated, and remorse set in for not having reviewed his plan at regular intervals over the years. Thankfully, we were able to suggest some alternative tools that did ultimately help his wife qualify for MassHealth benefits. Just think; if their trust had been irrevocable we could have turned our attention to that flour jar much sooner.

Read our related article, Qualifying for MassHealth Coverage for Long-Term Care: A Case Study, to learn how another couple qualified for MassHealth even though their irrevocable trust was within the five-year lookback period.