Revocable or Irrevocable Trust - Nursing Home Medicaid Protection in Wisconsin

Attorney Thomas B. Burton discusses should you use a revocable or irrevocable trust for long term nursing home and Medicaid asset protection in Wisconsin. Attorney Burton discusses the key differences between a revocable trust and an irrevocable trust and explains why only one of these two types of trusts is effective for nursing home, Medicaid and asset protection under Wisconsin Law and the current Medicaid rules.

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Transcript of video: Revocable or Irrevocable Trust - Nursing Home Medicaid Protection in Wisconsin

Welcome back to Estate Planning 101. I'm Attorney Thomas Burton. I'm an estate planning and asset protection attorney here in Wisconsin and I help people get peace of mind by putting a plan in place that protects their health and their property both during life and after death.

So a common question I see come up is folks wondering about how to protect their assets from the nursing home and long-term care and how that works with Medicaid. So in today's episode of Estate Planning 101, we're going to go over this topic - Revocable or irrevocable trust and nursing home Medicaid protection in Wisconsin.

So the common question I hear is do I need a revocable trust or an irrevocable trust and if you check out some of my other videos, I have a lot of videos on different trust topics but today we're going to focus specifically on whether a revocable or irrevocable trust is what you need for that nursing home asset protection here in the state of Wisconsin.

So the short answer to this is you're going to need an irrevocable trust, if you want that nursing home asset protection.

Now we're going to talk about why. So revocable living trusts are one of the most commonly used estate planning tools and they're very good tool and very effective at avoiding probate, avoiding the court administered probate process and getting your assets to the people you choose via private administration, after you're gone but if you want to add this Medicaid asset protection planning, to your trust, we're going to have to use an irrevocable trust in the state of Wisconsin and that's been the case since at least august 1, 2014 when the department of health services changed the rules to where they will now go after assets, held in revocable living trusts through the state recovery program. This is the program after you die where they get paid back for the funds they expended on your behalf in the nursing home through the Medicaid program.

So today in Estate Planning 101, I'm going to go through the yellow legal pad again and I'm going to just summarize the differences for you between the revocable and the irrevocable trust. So in both cases, the grantor of the trust, that's the person who creates it. The grantor is you, so you set up a revocable trust and you also set up the irrevocable trust. You're the one creating the trust and writing the rules for how it's administered. The big difference here is revocable means changeable. You can change it, at any time during your life. In fact, you can revoke it completely and take all the assets out and irrevocable means you cannot revoke it, you cannot change it after you set it up. So irrevocable thus is what we need for that asset protection for Medicaid because if they say you can change it and take the assets out, then those assets are what Medicaid calls an available asset.

So here's the first big difference between the trust, for the revocable trust, it's common that you are the initial trustee meaning the person in charge of administering the assets in the trust but for an irrevocable trust, we need to name someone else to act as trustee. A third party. It shouldn't be you or your spouse. In general, many people name an adult child or a relative or friend that you trust. Okay, so this is a big difference between the revocable and irrevocable and if you want this Medicaid asset protection planning, we're going to need to name a third party to administer this trust.

Now you don't have to put all your assets in the irrevocable trust but think about the types of assets you would want to protect. For instance, I have clients come to me who have a family farm or cabin or piece of land that's been in the family many years and sometimes, they're concerned about protecting this main asset. They may have significant other assets in fact, that they're willing to pay down for their own care but they would hate to see the family farm go to the nursing home, if for some reason they become the type of person who needs to spend a long time in the nursing home. So if you look at the statistics, a lot of people don't spend multiple years in the nursing home. It's 2 to 3 years or more but there's always the cases where someone is 7 or 10 years and that's the case where it's often, if you don't have long term care insurance, you'll go through a significant amount of assets because the current cost of care private nursing home room in the state of Wisconsin, over the whole state the average is between eight to nine thousand a month. So if you do the math in your head that quickly is approaching or over a hundred thousand in a year and that can diminish the assets very quickly for a lot of regular folks.

So think about the type of asset you want to protect when doing this type of planning and discuss it with your attorney.

Let's go through the other similarities and differences, okay, so the revocable trust avoids probate, yes and so does the irrevocable trust. So the great plan, great thing is either type of trust can be used to avoid probate after your death meaning no court administrated process and no probate court fees and lawyer fees for the probate after you pass.

So again they're similar. We can use the trust to avoid probate but up here again, we see the difference between the trustee, you versus someone else immediately.

Now asset protection. Well let's go to the last two here and I put them all on this one page this time, I should have had them flipping but okay, asset protection for the grantor for a revocable trust - no, meaning those assets are fully available to you. You can take them out at any time and they're not protected from creditors, nursing home, lawsuits or other things and that's just the way it goes.

However, with the irrevocable, that's where we can get the protection inside the trust for the grantor, again the person who created the trust. So you can put your own family farm in there and get the asset protection but you've got to put it inside the irrevocable trust and have it administered by the third party trustee.

And lastly, the revocable trust, we can create any time before your death or incapacity. You have to have capacity to create it but the irrevocable, we need to do five years before you need it. So this gets to the Medicaid look back period and they look at any asset that you transfer for less than value, they call it a divestment. So whether it's a gift outright, you give someone the family farm or you sell it to them for one dollar or you sell it to them for $50,000, under market value, if you transfer anything for less than fair market value within five years of applying for Medicaid is considered a divestment.

So to do this type of planning with the irrevocable trust, we want to do it five years in advance, okay? So what we're doing with the irrevocable trust is we're trying to create a box around these assets and then we put the assets inside the trust which can be real estate, cash, stocks etc. Commonly we use this for real estate like your home. So we have the irrevocable trust, and it's the box of protection around whatever assets we put in it and you'll see I put assets, real estate, cash, stocks, bonds, we can put lots of things inside the trust but we got to get them inside that wrapper and we got to do it five years ahead, okay?

So five years ahead, I'm going to write up top here on this timeline and I'm not an artist, I'm a lawyer but we got to do it, this whatever the date is, when we need Medicaid, we need five years ahead that we put the assets in. Then, excuse me, we put the assets in when we create the trust but we need five years, I'll put the arrow down here, how's this - five years to pass after.

So we put the assets in and then we need this five-year period after we put them in before we apply for Medicaid. So I'll put before Medicaid application and that is what gets us the assets past what they call the look back period which is the five years, Whatever month you file the Medicaid application, you need the assets five years to have been transferred to the trust, five years before that date.

So in general, when we're talking about doing Medicaid planning with irrevocable trust, just keep in mind, we have to plan ahead okay?

Now there's other things we can do when you're in what we call crisis Medicaid planning and I help people with that as well. Just be aware that I don't have as many options as if you come to me five years in advance of when you need it. So if you're thinking about this, a good time to think about it is in your 60s, early to mid-60s, if you have good health in the family, that's a good time to put in place the Medicaid asset protection trust.

Now you know your own personal health history, so I let every client decide for them what is their five-year horizon but that's also a good age to look at long-term care insurance according to what I'm told by many financial advisors. In fact, sometimes you may want to buy that in your early 50s before it becomes cost prohibitive. Many folks come to me after they've either tried to get long-term care insurance and it's too expensive because it's a monthly cost, every month or they may have a health condition where the insurance company won't write that policy because the insurance companies wrote these policies back in the 80s and 90s, the long-term care. This was a new product and they didn't really know how to price them and in fact many mispriced the policies and they are losing money on them. So when I have older clients with a policy from back then and they've been paying the premiums, I tell them to just keep paying because it's unlikely you could get that same policy today. In fact I read of a case of one life inch insurance company in Pennsylvania, that sold long term care. It came up in my news feed. They applied to the office of insurance to increase premiums by 300% in one year and so insurance is regulated, generally they have to receive approval but the state of Pennsylvania approved it because the long-term care costs were increasing that much. So even if you had that policy, for many people a 300% premium increase, if they aren't already wealthy, it might force them to cancel the policy and in fact I think that's what some of the companies want, so that they could remove that policy from their book. So just be aware, I don't sell long-term care insurance but you should discuss it with your financial advisor and look into it, in my opinion and see if it makes sense for you but returning to our discussion on the asset protection trust, just be aware that the best plan is one where we plan ahead five years in advance.

Now today, this video is going to be quite in-depth because this is a complex topic and I don't recommend you do any of this planning without the help of a qualified estate planning attorney, specifically one that practices an asset protection and elder law because not all estate planning attorneys do this area and I understand why because it's very complex, very fact identitive and the law changes often and it's a mix of federal state and tax law. So it's even more complicated than regular estate planning but today, my goal with this video is to educate people all over the state of Wisconsin who are out there, searching for answers and what I'm trying to do with this Estate Planning 101 University is I'm making it available to you for free on my YouTube channel because I strongly believe in client education and my hope is that over time, this is useful to you and it will come back to me, in my farm, over the long term just through the good vibes, the information, the sharing and caring about one another and the people who can find help through this video. So that's the goal of this series.

Now let me turn to the last part, I want to cover before we wrap up today's session of Estate Planning 101, okay? So lastly, I want to turn to why we have to do irrevocable now and you may have heard back in the day someone had a revocable trust and they were told it had some asset protection and I want to just be clear without getting too confusing, there was a time when revocable trusts did have some protection for Medicaid in Wisconsin. Basically after someone passed, the estate recovery program was not looking at assets in those trusts. They weren't going after assets that passed outside of probate but that all changed august 1, 2014. So if you have a revocable trust before that date, bring it up with your lawyer because I've dealt with clients like this and I have special reasons I may keep your, help you keep that revocable trust but be aware that the revocable trust is still going to cause a problem for qualifying for Medicaid because they, they're going to view those assets and the trust is available to you okay?

So I want to show you why and that's in the Medicaid handbook here, this is the latest release and there's a whole section on trusts, okay and this was released august 3rd, 2020. So they're always revising and updating this, the state of Wisconsin and that's why I say this Medicaid planning, you want to make sure, you're working with someone who knows about it and that it's effective as of the date you're doing it and in general, if you do some planning, put a good plan in place. Often, you're okay as long as the plan was effective when you put it in place because sometimes they'll say well starting from now like I said about those revocable trusts, any new revocable trusts have no protection at all. Some before august, 2014, have limited benefits but it's still in my opinion, if you're doing the Medicaid planning, you want to look at the irrevocable trust. Anyone thinking about doing it, now that's your option, okay? So the Medicaid handbook defines trust principle and here's how they define it - 'the trust principle is the amount placed in trust by the grantor' and if you'll recall, the grantor is you, the person who set up the trust plus, any trust earnings paid into the trust and left to accumulate'.

So let me break it down, trust principle is the asset you put into the trust. So let's say, it's your family cabin, worth $300,000, that's the principle you put into the trust, okay? Then they cover revocable trust, 16.6.3 - 'a revocable trust is a trust which can be revoked, cancelled or modified by the grantor or by a court'.

So this is any revocable living trust or it would be a trust in your will because you can change your will until you die, that would be changeable. 'A trust which is called irrevocable but which will terminate if some action is taken by the grantor is considered a revocable trust', so basically you can't get too clever with this and try to call it an irrevocable but then say I can undo it later and there are special, when you work with an attorney like me, we'll discuss your situation in detail. There's special things we can do and I'm not going to put them all in this video but just be aware that you can discuss those in private with your attorney but in general, the trust principle of a revocable trust is an available asset, okay? So they're saying right there, available asset means Medicaid, looks at the asset as if it's just in your own bank account. So that's the traditional rule with revocable trust and you're not going to get that asset protection because to help you for Medicaid, you need to put it totally into the box and get it out of your control, being managed by that third party.

Now, the definition of an irrevocable trust - 'an irrevocable trust is a trust that cannot, in any way be revoked by the grantor'. So there it is, that's what we need. We can set it up, there's flexibility, I can put into the trust and if you meet with me, we can talk more about that. I have some ways that allowed through the federal tax code and special powers but you can't totally change it later like a revocable trust. So let me read you now two examples from the Medicaid handbook about how this works and I think that'll be a good way to end today's topic.

Example one and they're right in the Medicaid handbook, so they're telling us this is what the workers at the state of Wisconsin go by, okay? They work for the Department of Health Services and they are good people but just be aware they are not lawyers. They're trained to administer the Medicaid handbook but they are not, all of them, there's some lawyers who work there but the people administering it, on a day-to-day basis, are not lawyers. They go by the handbook but they are not trained in all areas of tax, federal and state law. That's why you want to work with a lawyer, who focuses in this area when you're setting up your plan. Here's example number two, 'Al is a 65 year old Medicaid applicant. Six years ago, Al sold his farm for $300,000 and put the entire proceeds from the sale into an irrevocable trust, naming himself as the beneficiary. Al's friend Scott, was appointed as the trustee'. So there, a third party trustee which I talked about, which was good. 'Under the terms of the trust, Scott could disperse any amount of trust principle or trust income, at any time, either directly to Al or indirectly to provide some benefit for Al. The trustee had sold discretion as to when and how disbursements would be made as well as the amount that could be dispersed. Therefore $300,000 would be considered an available, non-exempt asset, for Al's Medicaid eligibility determination, even if the trustee never makes an actual disbursement'.

So here, they set up the irrevocable trust but they didn't do it right meaning they gave Al access to the principle and the income. So if you want that protection, we have to make it so Al does not have access to that principle anymore, the money in there. There's a way we can give him the income from the assets but not the principle and that's why I talk about a lot of times my clients want to protect real estate, family farm, cabin or other assets because that's a great asset that often isn't producing any income for them but it has significant value, the principle, right, that $300,000 cabin does have value but it doesn't, a lot of folks, it doesn't pay the money every month, in fact it often cost some money. Now in this case, Al sold the fireman and put the money in there which also works you can have an income only trust but the mistake here is he gave himself unlimited or if he set up himself or the attorney who drafted it, they gave him access to the principal. So we can't do that directly and have it be effective for Medicaid asset protection. So that's right there, in the handbook and that one's not going to work.

So now I'm going to read you example 2 which is example 3 which is a little better - 'Dave is a 65 year old Medicaid applicant, who won a $250,000 lottery, several years ago'.

Hurray! Hurrah! 'And put the entire amount into an irrevocable trust naming himself as the beneficiary', okay, so far, 'Dave appointed his brother, Don as the trustee', okay, good, third-party trustee. 'Under the terms of the trust, none of the trust principle could ever be distributed to Dave during his lifetime', excellent! That's what we have to do to have that protection for the principle. 'Don could only distribute the income that is produced by the trust to his brother Dave and Don has sole-discretion as to whether or not, any income is actually distributed'. So again, Don is the brother who's the trustee. Here's the answer from Medicaid, they're telling the worker how to view this when the Medicaid application comes in. 'The trust principle would be an unavailable asset since the terms of the trust prohibit any distribution of trust principle during Dave's lifetime'. So Dave could leave that principle to his brother, to his children after death you see but during lifetime, no principle. 'Any disbursement of trust income today would be counted as income to Dave in the month of the receipt'.

So in this case, they set up what we call an income only irrevocable trust. So the income that's throwing off that $250,000, let's say they put it in stocks, that pay dividends or bonds. That's income, that gets paid to Dave each month and he reports that on the Medicaid application as income but remember, you're allowed to have a certain amount of income each month and still qualify for Medicaid but that income will be applied towards your own care. What generally stops a lot of folks is the asset tes,t where you can't have more than $2000 in liquid assets, in your own accounts. Okay, so they say, 'any disbursement of trust income today would be counted as income to Dave in the month of receipt'. So as long as he is not over the monthly income limit, that's okay because Don is the authority to distribute all of the income any trust income which is not distributed by Don but instead remains in the trust is considered to be an available asset, okay, so what they're saying there is if you give that income power, even if Don says, they're not paying it out this month, they're going to consider it available. So when you're setting up this type of trust, work carefully with your lawyer to decide, do I want income from this trust and you may want that income but just be aware that if you do need the Medicaid assistance, you will pay that towards your own care and it's going to get reported and a lot of folks are okay with that, okay? They're okay with having income, their social security, their pension. They just don't want to lose that big principle asset and like I say, if you're putting in real estate, a lot of times, there is an income there but discuss it carefully with your lawyer and be aware, you can use these type of trusts for both assets that produce income and assets that don't and sometimes at my office, we'll separate those just to make sure we have that as extra protection for something like I said, like the family farm, if it's not throwing off income anyway but here the Medicaid handbook is saying the principal's protected but they will count the income.

So that's the takeaway from that. They did it right, Dave did it right. He set up the irrevocable, he made himself no access to principal and he named the third party which was his brother Don as trustee and this is all, I'm trying to simplify it, I apologize but it is complicated. So the key is to get the trust set up right and that's why I don't recommend you do any of this type of planning without the help of a qualified estate planning attorney because even to me who I go to conferences and continuing education on these topics, it can still become confusing. So you want to approach this planning very carefully.

Now there is some things and I have other videos about things you can do yourself, if you have limited means, how to create your own will in the state of Wisconsin, even a power of attorney for health care but this type of planning, if you have limited means, maybe you can't do this type, I mean it doesn't make sense to do this type of planning if and so, if you have enough means to do the planning, in my opinion it makes sense to pay an attorney for help because you want to get it right, otherwise it's not going to be effective at all, and the cost, there is a cost involved but compared to the monthly cost of nursing home care, it's much more reasonable than paying that every month and if you're looking to protect the asset, what you get from this is ultimately the peace of mind.

So I know this has been a lot today but overall, the revocable versus irrevocable trust for nursing home Medicaid protection in Wisconsin, you want to go the irrevocable route okay? Just keep that in your mind, you got to create that box and put the asset in there, the lock box if you will and that's how we get the asset protection.

So those examples from the Medicaid handbook, I wanted to run through just to let you see how they actually evaluate this in practice, when it comes in. Now there's, that's just one section of the Medicaid handbook. There's many more sections which I've kind of, I didn't go over at all today okay? I can't in this one video but that is the part about revocable versus irrevocable trust. Now if you have special needs, be aware we can set up a special needs trust for disabled individuals and we can also do something called a Wispact trust for disabled individuals and that's a non-profit, here in the state of Wisconsin. So if you're receiving a long-term disability because you're permanently disabled, that's also an option. So bring that up with your attorney if any of your heirs have that okay? At the meeting because we want to make sure those funds can be held in that special type of trust for them but again, today with Estate Planning 101, my new series, what I'm trying to do to everyone in the state of Wisconsin, I know we've all watched the YouTube video at one time or the other and got great value from it right, and often, it was someone just from the goodness of their heart thought to take a video of what they were doing, in fact the other day I watched one about how to change the headlight on my car and that was really useful because it was a different, a very different procedure than what the manual said and it saved me a lot of time. So that video really helped me and the next time I replaced the other headlight, I tried to create one to help folks. I found a little bit, I was able to get a little bit more of a view in there and what I'm saying is this video is the same thing, I'm putting this out there, I'm trying to help you okay, wherever you are, if you're thinking about this planning and you're the type that goes out and looks for information. So if this video has been helpful to you, what I ask in return is just consider giving it a like or a comment. It'll help others see the video and get this information as we go down the road whether it's a week, a month, a year, two years from now and it might help them find one of my other videos or some other lawyers videos on a topic they're needing help with because what I can do is help you self-educate and then when you're going to meet with me or another lawyer, hopefully you'll be better prepared to ask good questions at that meeting. So that you can spend the time on all those topics that are important to you.

And finally, if you're interested, I have a short guide on how to set up one of these nursing home asset protection trust. I mean if you watch this whole video, it's more in depth than the guide but it's got the high points, the five steps we need to take. I'll put a link in that video. You can go to the link and download it there.

So thanks for attending this episode of Estate Planning 101 and we'll see you next time.

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