Understanding Irrevocable Trusts and MassHealth: Protecting Your Assets While Qualifying for Medicaid

As people age, planning for the future becomes increasingly important, particularly when it comes to protecting assets and ensuring eligibility for benefits such as MassHealth (Medicaid in Massachusetts). For many, one of the key strategies is the creation of an irrevocable trust. These trusts serve to protect certain assets from being counted by MassHealth while ensuring they are passed on to loved ones. However, understanding what assets to place into an irrevocable trust and the limitations that come with it is critical. This blog will discuss the types of assets suitable for irrevocable trusts and their implications for MassHealth qualification.

What is an Irrevocable Trust?

An irrevocable trust is a legal arrangement where a grantor transfers assets into a trust, relinquishing control over the principal, while still possibly retaining some benefits from those assets, like income generated. Unlike a revocable trust, once an irrevocable trust is established, it cannot be easily altered or dissolved without the consent of the trust beneficiaries.

From a MassHealth perspective, the primary appeal of an irrevocable trust is that it can shelter assets, such as real estate or investments, from being counted when determining eligibility for Medicaid long-term care benefits. The catch? Any transfer of assets to an irrevocable trust triggers a five-year look-back period, during which the grantor could be ineligible for MassHealth benefits.

Real Estate and Irrevocable Trusts: What You Need to Know

One of the most common assets transferred into an irrevocable trust is real estate. However, it’s essential to understand the specific rules and guidelines around how different types of property are treated, both by the trust and by MassHealth.

Primary Residence

MassHealth doesn’t count a primary residence as an asset when determining eligibility for a single person with home equity below $1,033,000 (as of 2024). For a married couple, the primary residence is non-countable if one spouse continues to live in it. Despite this, many individuals choose to transfer their primary residence into an irrevocable trust for long-term planning and estate preservation.

When placing a primary residence into an irrevocable trust, the grantor can retain the right to live in the home through a “life estate” or a “right of occupancy.” This allows the grantor to continue living in the home for life while ensuring that the home isn’t subject to MassHealth estate recovery after their passing. Importantly, the right to live in the house doesn’t count as an asset or income for MassHealth purposes.

Vacation Homes and Second Properties

Other properties, such as vacation homes, are treated differently. MassHealth considers these assets countable, which means they can affect your eligibility if not protected. For example, let’s say your client, Mrs. J., owns a vacation home in Cape Cod. Mrs. J. wants to ensure that this family property is passed down to her children without being subject to MassHealth’s asset recovery. She can place the home into an irrevocable trust, which allows her to continue using it and even collect rental income if she wishes. However, she would no longer have access to the principal value of the property if it were sold, as the proceeds from the sale would remain in the trust.

The trust ensures that the vacation home is protected from MassHealth, as long as the transfer occurred at least five years before applying for benefits. This five-year look-back period is critical—if Mrs. J. applies for MassHealth within five years of the transfer, the value of the vacation home could disqualify her from benefits.

The Impact of Liquidating Real Estate in an Irrevocable Trust

One potential downside of placing real estate in an irrevocable trust is the inability to access the principal. For instance, if Mrs. J.’s vacation home is sold while she is alive, the proceeds from the sale must remain in the trust, and she cannot access the principal. Only the income generated from those proceeds could be paid out to her.

This limitation underscores the importance of careful planning. If Mrs. J. has no intention of selling the home and wants to pass it to her children, the irrevocable trust is a valuable tool. However, for clients who might need the equity from their real estate, another solution should be considered.

How Stocks and Investments Can Benefit from an Irrevocable Trust

Real estate isn’t the only asset that can be placed into an irrevocable trust. Stocks and other highly appreciated investments can also benefit from the protections offered by irrevocable trusts, especially if a client’s goal is to protect these assets for future generations.

Let’s say Mrs. Smith owns stock with a very low cost basis—perhaps she acquired it decades ago. The stock has appreciated significantly, but Mrs. Smith has no plans to sell it, preferring to live off the dividends and pass the stock to her grandchildren. By placing the stock into an irrevocable trust, Mrs. Smith can protect the asset from MassHealth, while still receiving the income. Upon her death, the stock is passed to her grandchildren with a “step-up” in basis, which reduces the capital gains tax they would owe if they chose to sell the stock.

The step-up in basis is a significant tax advantage. If Mrs. Smith simply gifted the stock to her grandchildren during her lifetime, they would inherit her original cost basis. If the grandchildren sold the stock, they could face a hefty capital gains tax bill. By using an irrevocable trust, Mrs. Smith ensures that her grandchildren receive the stock at its fair market value at the time of her death, which minimizes or eliminates capital gains taxes.

The Five-Year Look-Back Period and Its Impact on Medicaid Eligibility

A critical consideration when using irrevocable trusts for MassHealth planning is the five-year look-back period. Any transfer of assets into an irrevocable trust will be scrutinized if the grantor applies for MassHealth within five years of the transfer. If the transfer occurs within this period, MassHealth will impose a penalty period of ineligibility based on the value of the transferred assets.

For example, transferring a $575,000 home into an irrevocable trust within the look-back period could result in several years of ineligibility for Medicaid benefits. Therefore, timing is crucial, and it’s essential to begin asset protection planning as early as possible—ideally, while the grantor is still in good health and unlikely to need nursing home care in the near future.

Conclusion: The Importance of Early Planning

Using an irrevocable trust as part of an estate and asset protection plan can be an effective way to protect assets from MassHealth while ensuring they pass to loved ones. However, this strategy comes with certain limitations, especially regarding access to the principal and the five-year look-back period.

To avoid costly mistakes, clients should begin planning early, ideally in their 60s or earlier, when they are less likely to need nursing home care. An experienced attorney can help determine which assets are best suited for an irrevocable trust, and how to structure the trust to meet both estate planning goals and MassHealth requirements.

If you or a loved one are considering MassHealth planning and are concerned about protecting your assets, contact an experienced elder law attorney to discuss your options. The earlier you begin planning, the better positioned you’ll be to protect your legacy.

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