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How Irrevocable Trust Planning Saves You Money

Qualifying for Medicaid, MassHealth in Massachusetts, is one of the largest benefits of using an irrevocable trust as part of your estate plan. However, irrevocable trusts offer several important benefits

POSTED ON: March 29, 2013

Qualifying for Medicaid, MassHealth in Massachusetts, is one of the largest benefits of using an irrevocable trust as part of your estate plan. However, irrevocable trusts offer several important benefits to you and your family that you might not be aware of. Here are the top money-saving reasons why you should consider creating or adding an irrevocable trust to your estate planning strategy.

Medicaid (MassHealth) Qualification
In Massachusetts, statewide nursing home costs averaged $327/day for a semi-private room and $350/day for a private in 2012 (that’s over $127,000 per year). Assisted living, which provides fewer services and is appropriate for seniors who can handle most of their day to day activities, averaged $4,645 per month, without taking into account fluctuation in costs, which can be dramatic if a resident needs additional care. While the costs of care continue to rise, many families remain unable to figure out how to pay for these services. Often this leaves seniors in the position of having to rely on their adult children to cover their care expenses

MassHealth will pay for these costs for those who qualify. However, to be eligible for MassHealth an applicant needs to meet strict financial requirements. The basic rule for MassHealth long-term care eligibility is that the applicant, whether single or married, can have only $2,000 in countable assets in their name. If the applicant is married and the spouse plans to continue living in the community, the spouse is allowed to keep a maximum of $111,560 in their name. If an applicant applies to MassHealth with more assets that this, they will be required to spend down those assets to the applicable limit, usually on healthcare costs.

Obviously these asset limits put people who have saved to be able to provide for their families in the unenviable position of either being denied MassHealth eligibility or else having to spend all of their hard-earned assets on healthcare costs, leaving nothing for their families or selected charities.

However, when assets are transferred to an irrevocable trust they can be legally sheltered from long-term care costs, allowing the owner to immediately qualify for MassHealth. Assets transferred to an irrevocable trust can still be used by the owner. An owner of a house, for example, once transferred to an irrevocable trust, would still live in the house and pay their bills as they do currently. They could also rent out or sell the house and use the proceeds to purchase a new house. What they can’t do is remove principal from the trust. Principal is an asset’s value on day one after is has been placed in trust. By limiting direct access to this principal, we also shelter the principal from creditors and asset based programs such as MassHealth.

Crucial to this type of planning is understanding MassHealth’s five year look-back period. MassHealth has the right to examine an applicant’s bank and financial records for up to five years immediately prior to the application. If they discover a transfer of assets during this period, whether to a trust or another person, they will impose a disqualification period on the applicant’s eligibility. This makes planning well before a person actually requires MassHealth eligibility extremely important.

Protecting the Family Home
For those with relatively small estates, meeting the MassHealth asset requirements might not be a major concern. However, for those who have worked a lifetime paying down the mortgage on their family home there is still reason for concern. If you apply for MassHealth and meet their asset requirements, you will qualify for long-term care benefits even if you own your house. They will not make you sell it in order to get care. However, for every dollar of care you receive a lien will be place on your house. This lien will have to be paid off when you sell or transfer your home whether at death or otherwise. Homes that have been placed in an irrevocable trust and have satisfied the five-year look-back requirement will not have a lien placed on them and will be able to be kept in the family or else sold for their full market value.

Avoiding Massachusetts Probate
Whether you have a Will or not, when you pass away your estate must go through probate in order to be distributed to your heirs. This is a public process that involves filing an inventory of assets with a court and notifying creditors and potential beneficiaries through direct mail and newspaper publication. A typical probate in Massachusetts also requires that your estate remain open for at least one year so that creditors have an opportunity to make claims against the estate. All this leads to a time consuming burden on your loved ones and additional expenses to your estate (court and attorney fees) that can range from a couple thousand dollars to much more.

Assets in an irrevocable trust avoid probate completely, allowing your heirs immediate access to your assets in a privately administered process that costs you nothing.

Reducing Estate Taxes
Currently the Massachusetts estate tax exemption is $1 million. This means that if your estate (including your home, accounts, investments, other real estate, insurance policies, etc.) is valued at $999,999 you will pay no estate taxes but if you are $1 over a million, you will pay estate taxes on the entire amount (not just the amount that is over).

However, all too often married couples who have done no trust planning end up in this devastating and preventable scenario: spouse A passes away leaving everything to spouse B. No estate taxes will be due on the death of spouse A, however their exemption is now lost. Spouse B now holds the couple’s total net worth in the surviving spouse’s estate but still has only their individual exemption of $1 million available. If the combined estate is more than $1 million the surviving spouse will get hit with an estate tax.

By adding estate tax provisions to an irrevocable trust, spouses are able to parcel out the estate so that both $1 million dollar exemptions are maintained. Now, when spouse B passes away his or her estate tax exemption is effectively doubled to $2 million, allowing the surviving spouse to either significantly reduce his or her estate tax bill or avoid paying estate taxes entirely. The savings here can easily be in the tens of thousands of dollars.

Protection for Your Heirs
If you have young children or grandchildren, do you really want them to have access to their inheritance before they are mature enough to handle it? A trust allows you to name a trusted person to act as trustee for their inheritance, allowing the funds to be used for their health, maintenance and education, until they reach a certain age of your choosing, at which point they will receive the inheritance you have left them. By deciding how the money can be spent and who will have control over their inheritance until your heirs are mature enough to make good decisions with their finances, you can help protect your loved ones well after you have passed.

A trust can benefit adult heirs as well. Suppose one (or more) of your heirs is going through a divorce, bankruptcy or other creditor issue when you die. As soon as your Will distributes assets to them those assets are immediately available to their creditors. Instead of providing for your loved one’s well being, you may instead be financing their ex’s vacation plans or helping to repay a predatory lender.

When you leave your assets in a trust, your heirs can elect to delay payment of their inheritance until after they have resolved their financial difficulties. The trustee can hold the funds for them, keeping them out of the reach of creditors, and then distribute them when the dark clouds have passed. Again, your heirs will be counting their blessing that you thought ahead for their well being when they receive what you intended them to have, especially after a trying life event.

By planning ahead your hard earned assets can be protected from creditors and long-term care costs, taxes on your estate can be greatly reduced, probate costs eliminated and your heirs protected to use their inheritance as they see fit. In order to utilize a strategy such as this, however, timing is key—you can’t just wait for an emergency to hit, you must plan now. To learn more about the estate planning options available for your family, call the Heritage Law Center for a free consultation.