Cautionary Tales - Irrevocable Trusts and Medicaid - Episode 220

Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode of Legal Tea is the “cautionary tales” topic. And on these “cautionary tales” episodes of Legal Tea, we normally talk about real-life cases with real-life clients that are things me or my office have worked on -or they are things that I think are generally good things to be aware of, that way you don’t turn into a cautionary tale on my Legal Tea podcast one day! So… for today’s episode, it’s a listener request and it’s one that I’ve long-dodged because every state does things a bit differently, but I’m going to try to keep things high level enough. So, here’s what the listener asked: “I would really like you to do an entire episode on using irrevocable trusts in order to qualify for Medicaid LTC. Even if someone did qualify, are there any decent long-term care centers? What asset levels does this make sense for? A couple million or 10?” And I’m classifying this as a “cautionary tale” because Medicaid planning is SO easy to mess up on. And so many do.

Now, I know what some of you might be thinking – "Medicaid planning? That sounds like something only for people without means." But here's the reality check: long-term care costs can devastate even substantial family wealth. We're talking about nursing home expenses that can easily run $100,000 to $150,000 per year, and sometimes much more depending on state and cost of living. So today, we're going to explore some hard questions that many families are grappling with: (1) Can irrevocable trusts actually help you qualify for Medicaid while protecting family assets? (2) If you do qualify for Medicaid, what's the real quality of care you can expect to receive? (3) Does this strategy make sense if you have a couple million dollars? What about ten million? What about less than a couple million? And (4) And perhaps most importantly – what are the trade-offs and risks you need to understand before going down this path?

So let’s dive in…

So, up first .. can irrevocable trusts actually help you qualify for Medicaid while protecting family assets? The short answer is yes – absolutely. But there are some critical things you need to understand before you get too excited. First, let me clear up a huge misconception I hear all the time. If you're sitting there thinking, "Well, I already have a REVOCABLE trust, so I'm covered," I need to stop you right there. Revocable trusts offer zero – and I mean zero – asset protection when it comes to Medicaid eligibility. Why? It's actually pretty simple. With a revocable trust, you still completely control those assets. You can change the trust terms, you can take money out whenever you want, you can dissolve the whole thing tomorrow if you feel like it. Usually, in Medicaid's eyes, if you control it, you own it. Period. End of story.

So, irrevocable trusts are a completely different animal. When you put assets into a properly structured irrevocable trust, it kind of reminds me of the saying, “You can’t have your cake and eat it too.” Typically irrevocable trusts are done for a certain benefit – and usually those benefits are super cool. Hence why it reminds me of that saying. With any irrevocable trust, you are going to give up some level of control. And that loss of control? That is exactly what makes these trusts work for Medicaid – because you don't own or control those assets anymore. But here is where it gets tricky, and I really need you to pay attention to this part: Not just any irrevocable trust is going to work for Medicaid planning. The trust has to be structured very specifically to comply with your state's Medicaid rules. And here's the kicker – every single state has different requirements about how restrictive the irrevocable trust needs to be.

Some states are pretty lenient. They might allow you to still be a beneficiary of the trust, or they might let you retain certain limited powers. But other states? They are much stricter. They require you to have virtually no connection to the trust assets or benefits whatsoever. Some states have very specific rules about what the trust can and cannot distribute, when it can make those distributions, and who is allowed to serve as trustee. It's like a complicated recipe in my brain – miss one ingredient or get the proportions wrong, and the whole thing fails. This brings me to probably the most important point I'm going to make in this entire episode: You absolutely must work with an elder law attorney who does Medicaid planning. Not just any estate planning attorney – and I cannot stress this enough. A general estate planning lawyer might know how to write a beautiful trust document. They might be brilliant at wills and basic estate planning. But they likely don't know the intricate, constantly changing Medicaid rules in your specific state.

Okay, shifting to question #2 - If you do qualify for Medicaid, what's the real quality of care you can expect to receive? Now, I was listening to another podcast a few weeks ago and the hosts, a financial advisor who works with high net worth folks and an attorney who does not do elder law, were discussing the low quality of care that people on Medicaid get. I about came out of my seat because this is my world professionally and not theirs. A lot of people cannot afford private pay care. The answer to the question may actually surprise you. The old assumptions about Medicaid care? A lot of them are outdated. Let me paint you a picture of what is happening in the long-term care industry right now. More and more brand new, absolutely beautiful long-term care communities are going up left and right across the country. We are talking about facilities that look like luxury hotels – gorgeous common areas, state-of-the-art fitness centers, beautiful dining rooms, etc. And here's the thing that might blow your mind: these facilities are being built primarily for Medicaid residents, not private pay residents.

Why? It's basic economics. The harsh reality is that more people cannot afford private pay long-term care than CAN afford it. We are talking about costs that can easily run $8,000 to $12,000 per month, sometimes much more depending on your state. Most middle-class families simply cannot sustain that kind of expense for years and years and years. So developers and operators looked at the market and said, "Huh? Where is the volume? Where are the residents going to come from?" And the answer is Medicaid. So they're building beautiful facilities designed from the ground up to serve primarily Medicaid residents.

Now, let me address another outdated assumption. Remember the old days when nursing homes had what they called "Medicaid hallways or Medicaid wings"? You know, the less desirable rooms, maybe older parts of the building, different amenities for Medicaid versus private pay residents? Those days are long gone, and here's why: federal law no longer allows that kind of discrimination. Facilities that accept Medicaid cannot legally segregate residents based on their payment source. They cannot deny Medicaid residents access to the same amenities and services that private pay residents receive. This is huge. It means that if you are in a facility as a Medicaid resident, you have the legal right to the same level of care, the same quality of room, and the same access to activities and services as someone paying $10,000 (more or less) a month out of pocket.

I'm not going to sugarcoat this – there can still be differences between facilities. Some communities are absolutely gorgeous, well-run, etc., whether you're private pay or Medicaid. Others might be more basic across the board. But within any given facility, they cannot treat you differently based on how you are paying for your care. So the quality question isn't really "Medicaid versus private pay" anymore. Rather, it is about choosing the right facility, period. And that is a conversation about location, staffing ratios, activities, and overall management – NOT about your payment source.

Sorry to get on that soapbox…

Third question is: Does this strategy make sense if you have a couple million dollars? What about ten million? Well, here is the thing: this strategy can absolutely make sense across a wide range of asset levels, even for those with less than ONE million dollars, but your motivations might be different depending on where you fall on that spectrum. If you've got a couple million dollars or less, you may be looking at this as pure asset protection. Long-term care costs can easily burn through a significant amount, if not all, especially if both spouses need care. So for you, Medicaid planning might be about preserving something meaningful for your kids or grandchildren instead of watching it all disappear to nursing home bills.

Now, if you're on the higher end of that spectrum with ten million dollars or more, you might be thinking, "You know what? I actually feel pretty comfortable that I have enough to properly pay for quality long-term care without worrying about it." And that's totally fair – maybe protecting against long-term care costs isn't your primary goal. But here's the thing: if you don't feel that way – if you're still interested in asset preservation – these same irrevocable trusts do NOT have a maximum asset limit. It is NOT like they're only available for people with a few million dollars or less. Really, it is an available option for anyone that has a goal of protecting assets against long-term care and Medicaid.

Now, I do want to address something head-on because I know some of you are thinking it: there are people who feel this strategy is immoral or unethical – that people should not be allowed to do this kind of trust planning to use Medicaid benefits. I’d be remiss if I did not touch on this. Here's the reality: this is perfectly legal and allowed under current law. And it is really no different than people who set up irrevocable trusts for other reasons – like estate tax avoidance, asset protection from creditors, etc. Different people have different goals and different priorities, and that is okay. The Medicaid rules provide these planning opportunities, and families are free to use them as part of their overall financial strategy – if they want to. And that is your choice.

So as we wrap up, remember that when you put assets into an irrevocable trust for Medicaid planning, you are making a fundamental decision about control and flexibility. Remember my saying … you cannot have your cake and eat it too. But some states do allow for more flexible irrevocable trust structures, so at the same time, do not write this strategy off too quickly without exploring your options. And I’ll say this until I am blue in the face … if this is something you want to explore, you absolutely should work with an elder law attorney who knows your state's specific Medicaid rules inside and out. Because done right, this can protect your family's financial legacy. Done wrong, it can be an expensive mistake that provides no protection at all.

Alrighty, let’s shift to a sneak peak of next week, which we’re circling back to the “current trends” topic where we talk about things that are going on currently that impact my estate and elder law world – or maybe, things that I have stumbled upon on the news or social media that is relevant to this podcast. Next week, we are going to talk about the dangers of taking advice from online sources, i.e. TikTok, LinkedIn, etc. without seeking legitimate legal advice against your exact fact pattern. So, that’s what next week will be about, Legal Tea Listeners, so until then, be well and talk soon!

Sources:

None.