Giving Away Your Home? –Beware Part II: (January 2014)
Last month I wrote about the pitfalls of giving your home away without protecting yourself. We came to the conclusion that if you think you have 5 years of good health when you can still live at home before you might need nursing home care, it can be a good idea to transfer your home to your children or other loved ones while keeping a life estate for yourself (and for your spouse) so that you can’t be kicked out of your home.
I left you with a teaser saying that I’d reveal to you why giving your home to an irrevocable trust for the benefit of your heirs (while keeping a life estate) is better than giving your home directly to your loved ones. Many people are frightened by the idea of an irrevocable trust. Just the word “Irrevocable” can sound so intimidating. It sounds so permanent and unchangeable. They fear that once they transfer the home to the irrevocable trust, they’ll lose all control over their home and they’ll never be able to sell it. There are a lot of myths about irrevocable trusts and most people—even many lawyers—don’t accurately understand them.
For example, I had one client come into my office and bring me a copy of their “irrevocable trust” that another lawyer made for them. He had told the client that this would work to start the 5 year lookback clock ticking in order to qualify for Medicaid for nursing home costs and yet protect his home. When I looked at the client’s “irrevocable trust”, it was nothing more than a standard revocable living trust, which the lawyer had made an amendment to changing it to be irrevocable. Although it did become an irrevocable trust at that point in time, which meant it could no longer be amended or canceled, it did NOT protect his home for Medicaid planning purposes and did not start the 5 year period for lookback purposes. Why? Because the revocable living trust said that the client is the trustee and the primary beneficiary of the trust during his lifetime. Just because the lawyer amended it to make it irrevocable—so the client couldn’t make any more amendments—did not mean that it was an irrevocable trust that would work for Medicaid planning. If you are the beneficiary of any trust, whether revocable or irrevocable, any amounts that could be distributed to you from that trust will be considered your available resources for Medicaid qualification purposes.
So what is the advantage of using a properly drafted Irrevocable Trust for Medicaid asset protection purposes? One reason is asset protection for your beneficiaries. If you just give you home 1/3 each to your three children and keep a life estate, they can’t kick you out of your house, but they could sell their 1/3 share of the inheritance (future use/ownership of your home) to a stranger, or they could have their share taken away from them by a divorcing spouse or by a creditor in a lawsuit or bankruptcy. This is probably not your intention.
Another reason is that you can designate who (other than yourself or your spouse) can be the trustee to manage the assets for the beneficiaries. Let’s say that you have three children, all of whom you would like to inherit equally from you after you pass away, but only one whom you would trust to have control of your finances or of your home while you are living. You can name your most trusted child as trustee, knowing that the rascal beneficiary can’t do any mischief with your assets as the trustee has complete control of the irrevocable trust’s share of the home (or other assets). If you don’t trust any of the children because they might all try to cheat each other, you could name your best friend or a local bank to be the trustee and know that your wishes would be carried out during the rest of your life—even if you become incompetent—and also after your death.
Finally, if you ever wanted some of your assets back, it can be tricky to get them back once you’ve given them away. If you give directly to your children or other beneficiaries, they might not be willing to give your home back to you even if you ask nicely. However, with an irrevocable trust you haven’t given it to the children yet, you’ve only given it away to the trust. Even though the trust is irrevocable, you can still have the right to make assets come out of the trust before you pass away and go to other beneficiaries than you originally intended. Yes, you can do this even though the trust is irrevocable and can’t be amended—but only if the irrevocable trust is created properly with very flexible language from the beginning. Of course, you may not be the beneficiary to receive the assets directly from the trust, but you can make it all come out of the trust and go to your most trusted child or best friend…and if you ask them nicely, they’re more likely to be willing to give those assets back to you.
Although it sounds unusual, we have perfected the drafting of an irrevocable trust for Medicaid asset protection purposes. Our clients can get their assets out of the trust and to any trusted beneficiary while still alive. Another unusual feature we offer is the ability for the client to rent out their home while in the nursing home and having the irrevocable trust receive the rental income for the benefit of the family (or to maintain the home) instead of it all going to the client and then having to be paid to the nursing home (which is the case if the client keeps a life estate in the traditional way).
The message to take home today is that you do not need to be afraid of an irrevocable trust if it has been prepared by a clever attorney who builds a lot of flexibility into your plan. Our irrevocable trust for nursing home Medicaid asset protection is our most popular estate plan. When clients learn how powerful it really is and what can be done with it, they usually decide that it’s the best plan for them—especially if they were already planning on giving away their home or other assets.
© OKURA & ASSOCIATES, 2013