Trusts

A trust is a contract between the person who creates the trust (usually called the "grantor," "settlor," or "trust maker") and the person who is responsible for the trust (called the "trustee"). Once the trust is created with assets and property transferred to the trustee, the trustee manages and holds those assets for the benefit of one or more people who are called "beneficiaries."

The beneficiary might be the person who created the trust. It might also be other people. That all depends on the goals at hand. How those beneficiaries receive money is also a matter of the grantor's goals. The trustee might have discretion to make distributions only for education. Other trusts might grant the trustee discretion to make distributions for any reason at all. And others might say no distributions until age 45. Again, trusts are usually custom fit to a client's goals.

Revocable vs. Irrevocable Trusts

There are many different kinds of trusts, each serving a different function to accomplish a particular client's goals. We generally divide trust into two categories: "revocable trusts" and "irrevocable trusts." Revocable trusts can be canceled by the person who created it with any assets held under the trust being returned to that person. On the other hand, irrevocable trusts cannot be canceled by the person who created it.

Revocable Trusts Revocable trusts are often used to avoid probate and for tax planning. In today's tax world, estate taxes affect very few people. Because of that, trusts are now used for wealth transfers concerns. When someone has young children who shouldn't inherit at age 18 or a beneficiary with bad spending habits, a trust can control that money for a much longer period of time.

Why would someone want an Irrevocable Trust?

In Medicaid planning, our goal is usually to transfer ownership of property from someone who wants benefits to accomplish spend-down. In this case, a revocable trust doesn't work because the person can cancel the trust and get the money back. So here, we need the legal arrangement to be that the person cannot get the money back. Once that's the case, it's no longer a resource.

But can they get their money back?

Depending on how the trust and beneficiaries are arranged, yes the person "can" but he can't legally enforce that ability. Under most Medicaid planning trusts, the trustee has complete discretion on whether to make any distributions to a beneficiary. If the trustee makes a distribution, once it leaves the trust, it belongs to the beneficiary. At that point, the beneficiary has a choice to make: Help the person who created the trust—or—keep it and do something else with it. Under the law, the beneficiary has a free choice to make. Yes, there might be a moral obligation to give it back. But it's not a "legal" obligation. Courts only enforce legal obligations. And so the beneficiary may follow the moral obligation to give the money back and so that person might get back the money. But at the same time, the beneficiary might not be willing to follow the moral obligation. It's this freedom of choice that opens up the ability for people to plan for Medicaid with some confident "hope" that the beneficiary will help them. And once the trust is funded, "hope" is all they legally have.

Does an irrevocable trust hide money for Medicaid?

No. Trusts don't "hide" money. Rather, they change ownership. If the change takes place during the look-back, that transfer must be disclosed and reported. At that point, Medicaid will review the transfer to determine whether an exemption or penalty applies. Failing to disclose the transfer would be Medicaid fraud.