Five Things to Think About When Considering an Irrevocable Long-Term Care Trust

It’s no secret that the cost of long-term care is spiraling out of control in this country, and, consequently, it’s no wonder that more and more clients are expressing concerns to us about wanting to “protect” their assets from being depleted by the cost of such care. Clients will frequently mention either that they heard on the radio, TV, or the internet that they can accomplish this using an irrevocable trust or that they have a friend, neighbor, or relative who put their assets into an irrevocable trust for this purpose. While irrevocable trusts can absolutely be used to protect assets from being spent on long-term care, they are not a universal “one size fits all” solution, and they are not without drawbacks. With this in mind, here are five things to think about if you are considering an irrevocable trust to protect assets for long-term care purposes (an “irrevocable long-term care trust”):

1. You Have to Give Up Control. Despite what numerous radio, TV, and internet ads would have you believe, you cannot protect your assets from being spent on nursing home care while retaining full control over them. Under federal and state law, assets in an irrevocable long-term care trust created by you (or your spouse) are subject to the “any circumstances” test, meaning that if there are any circumstances under which the assets could be distributed to you or used for your benefit, the assets will not be protected and would need to be spent on your long-term care before you would be eligible to receive public long-term care benefits (part of the Medicaid program, known as MassHealth in Massachusetts). As a result, in order for an irrevocable long-term care trust to function as intended, you cannot have any right to access the assets in the trust once they have been transferred into it, nor can the trustee (the person in charge of managing the trust’s assets) have any ability to distribute the assets directly to you or use them directly for your benefit. This means that, among other things, if your house is transferred into an irrevocable long-term care trust you will not be able to access its equity through a home equity line of credit or a reverse mortgage. Additionally, trust funds could not be used to directly pay for services for you, such as an assisted living facility or home health aides. Finally, while you would retain the ability to remove and replace the trustee, you could not serve as the trustee yourself and, therefore, would not be able to directly manage the assets in the trust.
2. You Have to Have the “Right” Assets to Fund the Trust. When it comes to funding an irrevocable long-term care trust, not all assets are created equal. In particular, you cannot transfer tax-qualified retirement accounts (e.g., IRAs, 401(k)s, etc.) into a trust without immediate income tax consequences. This is because such accounts have to be converted into taxable brokerage accounts (or cash) in order to be transferred out of your individual name, meaning you would be taking a taxable distribution equal to the entire balance of the account. So, if you were to transfer a $300,000 IRA into the trust, you would have $300,000 of additional taxable income reportable on your personal income tax return for the year the transfer is made. Additionally, it is not generally a good idea to transfer a home with an outstanding mortgage into an irrevocable trust. This is because if you continue to pay the mortgage with your own non-trust funds, such payments could be considered additional gifts to the trust (since you no longer own the home in your individual name), which could create problems in the event you need to subsequently apply for MassHealth long-term care benefits.
3. You Have to Wait Five Years Before Applying for Long-Term Care Benefits. In order to avoid the possibility of people transferring their assets into an irrevocable long-term care trust and then turning around and applying for MassHealth long-term care benefits the next day, state and federal law give MassHealth the authority to review all of your financial transactions for the 60 months (5 years) immediately preceding your application for long-term care benefits. Any and all gifts and other transfers for less than fair market value made during that time, known as the “lookback period,” are considered to be “disqualifying transfers,” which will delay the start of your MassHealth long-term care benefits for a period of time determined by the value of the assets transferred. If significant assets are transferred, this delay can last several months, if not years. Thus, an irrevocable long-term care trust is generally not a good idea unless you are confident that you will not need MassHealth long-term care benefits until after the end of the lookback period and/or you retain sufficient assets in your individual name to pay for your care needs during the lookback period.
4. You Are Limiting Your Options Going Forward. A fellow practitioner once told me that he counsels clients that irrevocable long-term care trusts effectively guarantee that they’ll wind up in a nursing home if they need long-term care in the future. While this is a bit of an exaggeration, it is definitely true that an irrevocable long-term care trust severely limits your options going forward. This is because, as of now, MassHealth long-term care benefits are geared primarily towards nursing home care. Although there are some community-based long-term care benefits available, as a general rule these benefits do not cover 24/7 home health aides, nor do they generally cover assisted living facilities. Further, even within the realm of nursing home care, MassHealth long-term care benefits will only cover a semi-private room (meaning you would be sharing a room with someone else). By contrast, maintaining assets in your individual name gives you the ability to tap into those assets (through, e.g., a reverse mortgage or home equity line of credit on your home) to allow you to be cared for in the most comfortable, least restrictive setting possible for as long as possible.
5. It Might Not Work. Eligibility for MassHealth long-term care benefits is governed by a complex web of state and federal statutes, regulations and court cases. These rules change frequently, particularly at the state level, and often apply retroactively, meaning that no exception is made for irrevocable long-term care trusts that were created prior to the new rules taking effect. Thus, what is permissible today may not be permissible tomorrow, and an irrevocable long-term care trust created under today’s rules may be in violation of the rules that exist at the time you apply for MassHealth long-term care benefits. Further, MassHealth has a history of aggressively reviewing and challenging applications for long-term benefits that include irrevocable trusts (the existence of an irrevocable trust must be disclosed to MassHealth even if it was created outside of the lookback period), and anecdotally most such applications appear to be denied on the first pass, necessitating a costly and time-consuming appeal.

A properly structured irrevocable long-term care trust can be an appropriate tool to protect assets from being spent on long-term care, but just like a power drill isn’t always the appropriate tool with which to fasten a screw, an irrevocable long-term care trust is not always the appropriate tool for long-term care asset protection. It is important, therefore, to consult with an experienced elder law attorney to determine the best tools to achieve your goals given your specific circumstances.

August 2021

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