Worried About Future Medical Bills? Consider an Irrevocable Trust

America is currently experiencing multiple demographic shifts, one of which is based on age. According to the Population Reference Bureau, the number of Americans over 65 will more than double from 46 million today to 98 million by 2060. The Baby Boomer Generation alone may fuel a 75% increase in the number of Americans requiring nursing home care, from its current 1.3 million needing care, to 2.3 million by 2030. As demand increases, current resources will be spread thinner. Without an adequate increase in supply of nursing home care, prices will rise as well. Additional challenges include the future solvency of the Medicare* system. It is critical to develop a comprehensive Estate Plan now more than ever, especially as policymakers struggle to allocate resources across a larger population.

One strategy to protect assets is an irrevocable trust. Irrevocable trusts differ from revocable trusts because they cannot be amended or destroyed until the trust term expires. They are, as the name suggests, irrevocable. The person forming any type of trust is known as the “Settlor” or “Grantor.” The Settlor will pick a trustworthy individual, called a “Trustee,” to take possession and manage the property. The Trustee then distributes the property according to the Settlor’s wishes to persons picked by the Settlor. They are called “Beneficiaries.”

The disadvantage of an irrevocable trust is that any property placed in the trust is no longer owned by the Settlor and the Settlor can never outright own that property again. This disadvantage is also an advantage because if the Settlor does not own the property, then creditors cannot take the property to satisfy debts incurred after the formation of the trust. You cannot transfer property to an irrevocable trust to avoid debts you already have, but if you anticipate future debts, such as nursing home care or medical bills, placing your major assets in an irrevocable trust early can ensure your beneficiaries receive them instead of your creditors.

A common example is for the Settlor to deed the primary residence to the irrevocable trust while maintaining a life estate in the property. This allows the Settlor to remain living in the house until it is no longer feasible. If the Settlor incurs large medical bills or nursing home bills, the primary residence cannot be used to satisfy those debts. Another advantage to this process is that it decreases the Settlor’s net worth on paper, and may make the Settlor eligible for Medicaid whereas before the Settlor didn't qualify for Medicaid. However, the federal government is very aware of this tactic and imposes a 5 year “look back” window to penalize people who would not be eligible for Medicaid if they continued to own the property. As long as the property is placed in the irrevocable trust more than 5 years before an application for Medicaid is filed, there will be no penalty. This is another reason why it's important to create a comprehensive Estate Plan sooner rather than later.

There are additional advantages and disadvantages to forming an irrevocable trust. Because an irrevocable trust cannot be undone, it is critical that you consult with an attorney and financial adviser before transferring property to an irrevocable trust. You may wish to form a revocable trust first to get used to the mechanics while still being able to re-obtain your property. The attorneys at Barsotti & Manley, PLLC, can help you decide which Estate Plan is right for you. Call us now at (859) 429-3444.

*Medicare is split into 4 funds. Medicare Part A is the only fund in current risk of insolvency. However, this is the particular fund used to pay for nursing home care and acute hospital visitation. Medicare Part A is simply not funded adequately to deliver all the benefits currently offered beyond 2028. While defenders claim it is “not going broke,” that analysis depends on the belief policymakers will agree to decrease benefits or raise taxes, an assumption that is not safe to make in the current political environment. So for the purposes of this article, the future solvency of Medicare is in serious question.