Can an irrevocable trust help you protect your assets?
Irrevocable trusts can be a valuable tool for Wealth Preservation Planning. They are one of the most effective ways to protect assets from costs like long-term care and estate taxes. Yet the word “irrevocable” still conjures fear and images of homeless parents that have been thrown out of their own homes by their kids. Under modern rules, and with an estate planning specialist by your side, the reality looks very different from the word.
What is an irrevocable trust?
The simple definition is that an irrevocable trust is a trust that can’t be changed once it’s been completed. But the simple definition is misleading. When done right, you can get the benefits of an irrevocable trust, such as long-term care protection and estate tax benefits, but still remain in the driver’s seat when it comes to controlling property in the trust.
Am I giving up control with an irrevocable trust?
Not if you do it right. The common fear in estate planning is that many people are wary of the term “irrevocable” because they think it means giving up control of their assets. With the 2012 enaction of the Massachusetts Uniform Trust Code, however, and the guidance of an experienced estate planning attorney, irrevocable trusts can be a flexible and effective way to protect your assets and reduce your estate tax liability. Make no mistake, this is specialist-level planning. With the right attorney as your guide, these trusts can protect millions of dollars in assets and save you just as much in estate taxes.
Why use an irrevocable trust?
Irrevocable trusts have many purposes, but the two that we use them for the most are:
Protecting assets, like your home, from long-term care. ONLY irrevocable trusts can provide this protection. Revocable trusts DO NOT provide protection from long-term care; if you have a revocable trust, you do NOT have long-term care protection in place!
- Reducing estate taxes (also known as death taxes). Yes, you can’t even die without being taxed! The estate tax is a tax paid by your estate if the value of your estate goes over a certain threshold. Massachusetts has among the lowest estate tax thresholds in the country, at $2 Million, including your home equity, cash assets, and life insurance death benefits, and Massachusetts has among the highest estate tax rates. Irrevocable trusts can be used to remove assets from your “taxable state” and therefore reduce your estate’s tax liability.
Revocable or irrevocable — which one protects you from MassHealth?
This is the question we are asked most often, and the answer is not the comfortable one. A revocable trust gives you no protection from MassHealth at all. Because you keep the power to change it, revoke it and take the assets back, MassHealth still counts everything inside it as yours. That is exactly what “revocable” means, and it is why a revocable trust is a probate-avoidance tool rather than a long-term care tool.
A properly drafted irrevocable trust can protect those same assets, because you have genuinely given up that control. The trade is real and we will not pretend otherwise: you cannot simply undo it, and you cannot reach in and take the principal back. What you get in exchange is that after the five-year look-back period has run, those assets are generally outside what MassHealth counts when it decides whether it will pay for your nursing home care.
The five years are the part people underestimate. The clock starts when the transfer is made, not when care is needed, which is why this planning works when it is done early and does far less once somebody is already unwell. If a nursing home is already on the horizon, there are still steps worth taking, but the options narrow, and they are different options.
Worth knowing what that care actually costs before you decide: our long-term care cost calculator shows current Massachusetts nursing home figures.
What are some types of irrevocable trusts?
Medicaid Trusts
One type of irrevocable trust is what we call the Medicaid Trust. There are other names for it, but that’s the easiest one to remember. That’s because the point of the trust is to protect assets from Medicaid and allow you to qualify for Medicaid long-term care benefits (in Massachusetts, the Medicaid long-terms care program is run by MassHealth). The trust is designed to protect assets from being counted towards Medicaid eligibility requirements. With a Medicaid Trust, assets are transferred into the trust and are protected from being “counted” as assets by MassHealth when they determine eligibility While Medicaid Trusts can be complex, an experienced elder law attorney can help guide you through the process and ensure that your assets are protected.
It’s important to note that Medicaid Trusts have strict rules and requirements that must be followed in order to be effective. For example, the individual must transfer their assets into the trust at least five years before applying for Medicaid in order to protect the asset (more on that, below). In addition, the trust must be irrevocable and the trustee must manage the assets in accordance with Medicaid rules. Medicaid Trusts can also provide peace of mind for individuals who are worried about the cost of long-term care and the impact it could have on their assets.
However, this is where strategic estate planning is necessary. The transfer of your home into an Irrevocable Trust must be done at least five years before you apply for MassHealth. This is sometimes referred to as the “five-year look-back” rule. If done correctly, your home would then be off-limits to MassHealth’s asset calculation and protected. It’s important to note that selling or downsizing the home partway through that time period wouldn’t have a negative effect and does not re-start the five-year clock.
Life Insurance Trusts (ILIT)
Another example of an irrevocable trust is the ILIT, or irrevocable life insurance trust. This type of trust is used to remove life insurance proceeds from a taxable estate, reducing the amount of estate tax owed. The ILIT is designed to hold life insurance policies, with the trust as the owner and beneficiary of the policy. The trust then distributes the proceeds to the beneficiaries, outside of the taxable estate.
This can be a significant advantage for those with larger estates who may be subject to high estate tax rates, or for individuals or couple’s whose life insurance puts them over the Massachusetts estate tax threshold of $2 million. If you have a policy worth $2M or more, you’re already over the estate tax threshold and should expect to have your estate taxed! That is, unless you do the proper planning.
The trust can also provide flexibility in distributing the proceeds of the policy, allowing the grantor to choose who receives the proceeds and how they are distributed (for example, distribute over time to children, as opposed to lump-sum).
Estate Tax Trusts for your Home – (QPRT)
QPRT, or qualified personal residence trust, is another example of an irrevocable trust that can be a useful estate planning tool. With a QPRT, the grantor transfers their primary residence into the trust for a specific term, such as 10 or 15 years. During this term, the grantor can continue to live in the home and enjoy all the normal benefits of ownership. At the end of the term, ownership of the home passes to the beneficiaries, or another trust, outside of the taxable estate. This can be a valuable way to remove the value of your home from your estate and reduce your estate tax liability by hundreds of thousands of dollars!
It’s important to note that irrevocable trusts are not a one-size-fits-all solution for everyone. Modern rules have made irrevocable trusts more flexible and customizable than they were in the past, but it’s still important to carefully consider the potential benefits and drawbacks before making any decisions.
While the word “irrevocable” may sound scary to some individuals, irrevocable trusts are powerful estate planning tools when used correctly. Medicaid Trusts, ILITs, and QPRTs can all provide significant benefits when it comes to protecting assets, reducing estate taxes, and preserving wealth for future generations. By working with an experienced elder law attorney, individuals can create an irrevocable trust that meets their needs and provides peace of mind for themselves and their families.
In conclusion, while the idea of an irrevocable trust may seem intimidating, they can be powerful estate planning tools when used correctly.With the help of a skilled estate planning attorney, irrevocable trusts like Medicaid Trusts, QPRTs, and ILITs can help protect assets, reduce estate tax liability, and provide peace of mind. Modern rules and the guidance of an experienced attorney have made irrevocable trusts more flexible than they used to be. Don’t let fear hold you back from exploring the benefits of these trusts for your estate plan. We encourage you to take the next step in securing your legacy by ordering our free report, “5 Trusts That Can Wreck Your Estate Plan.” Our report will provide you with the information you need to make informed decisions about your estate planning goals and options.
So Does an Irrevocable Trust Actually Protect Assets From MassHealth?
It can, when it is properly designed, funded and administered, and the transfer rules have been satisfied. The protection doesn’t come from putting the word “irrevocable” on the document. It comes from the legal restrictions on access to the assets, how those restrictions fit Massachusetts law, and when the property was actually transferred. Two documents both called irrevocable trusts can produce completely different eligibility results.
The Availability Test Is the Whole Ballgame
The central question is whether the trust allows assets to be made available to you. The MassHealth regulation puts it plainly: resources held in a trust are considered available if, under any circumstances described in the terms of the trust, any of the resources can be made available to the individual. Note what that means, trust principal that could be paid to you or used for your benefit can be treated as available even if the trustee has never actually made that payment. A family’s understanding that the money is “for the children” does not override language allowing the trustee to hand it back to the parent.
That is why the restrictions have to be explained before you sign. If the plan depends on preventing distributions of principal to you, you need to understand what that means the day you want money for a major expense. An adult child serving as trustee cannot simply disregard the restriction because the money originally belonged to you. We need to look at what you will keep outside the trust and whether your income and accessible resources will cover your needs.
Living in a Trust-Owned Home: What the Daley Case Settled
Income and principal also need separate consideration. Some trusts allow income to be paid to the person who created the trust while restricting access to principal. That does not mean the income is ignored for MassHealth purposes. Nor does keeping the right to live in a trust-owned home automatically make the whole property available. In Daley v. Secretary of the Executive Office of Health and Human Services, 477 Mass. 188 (2017), the Supreme Judicial Court held that neither a right of use and occupancy in a home deeded to an irrevocable trust nor a retained life estate makes the equity in that home a countable asset. But read the rest of that decision: the court sent both cases back for findings on other possible countable assets inside the trusts. Using the home and being entitled to consume the trust principal are different things, and the rest of the document still matters.
Timing: the Clock Runs From the Transfer, Not the Signing
Funding a trust that makes property unavailable to you can itself be a transfer subject to the five-year look-back for MassHealth long-term-care benefits. If you need benefits during that window, the transfer may create a payment penalty unless an exception applies. Signing a trust five years ago does not put every asset outside the review period if you only moved the house or the investment account into it last year. The date that counts is the date of the transfer.
A Trust Has to Actually Own the Assets
A trust can only protect what it owns. A signed document sitting in your estate planning binder will not change the ownership of a house that is still in your individual name. Accounts and real estate each require the appropriate transfer steps, and later additions need their own review. Funding should be documented so your family can establish what was transferred, when, and which terms governed it.
Administration matters after funding too. Selling a trust-owned house may be permitted, but that does not mean the proceeds can be dropped into your personal account. Making distributions, adding assets or changing the arrangement can all affect the analysis. Tax treatment needs separate attention as well, because MassHealth protection, income tax treatment and estate tax inclusion are three different questions, an asset can be treated one way for one and differently for another without the plan being inconsistent.
If you already have an irrevocable trust, bring the document and the funding records. We can explain what protection it is designed to provide, what remains exposed, and what you and the trustee need to do to preserve the intended result.
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