A living trust can be Revocable or Irrevocable, although most people mean a Revocable Trust when using this term. These offer the Grantor the ability to transfer property to a Trustee while they are still living. After the Grantor’s death, the Trustee can transfer or sell without having to deal with the expense and hassle associated with probate court.

These are special planning trusts which are often needed for married couples, particularly if one spouse is already on Medicaid or soon will be. These are created through an individual’s Last Will and Testament. They do not exist until one spouse passes away. When that occurs, the Trust is established via the probate process. Probate is required if you want a Testamentary Trust, it cannot exist otherwise. But for your troubles, any assets that make their way into the trust are automatically protected. There is no five year Medicaid lookback. From there, assets can be spent on the surviving spouse or given to beneficiaries.

An Irrevocable trust is a permanent (but surprisingly flexible!) entity designed specifically to protect your assets during lifetime, and to avoid the hassle of probate. An individual transfers their assets into the trust, which becomes the owner, and a Trustee manages that trust. The person making the trust (“Grantor”) can also be a Trustee. This transfer can protect your assets from being counted towards the $1,600 Medicaid eligibility limit. The Deficit Reduction Act, created by Congress in February 2006, changed the application rules for Medicaid. This act established what is known as a look-back period. This allows Medicaid to examine your finances over the five years prior to the application. Since the creation of this act, people who hope to qualify for Medicaid need to think five years ahead. Those who suffer from a chronic illness have to plan and transfer their assets at least five years before they need Medicaid in order to qualify without penalty. Last minute crisis planning options are available, particularly when there is a spouse, or a disabled child. Transfers within the five year lookback may be assessed a “penalty” which is more of a “time out” than a fine. More explanation can be found on the Medicaid page.

Irrevocable does not mean inflexible. Although the Grantor and their spouse cannot take anything back from the trust, they do maintain control. If a house is in the trust it can still be sold. Downsizing to a new place is an option. If there is money in the trust it can still be invested. Stocks can be traded, for example. The trust can own any type of account such as a checking, CD, or brokerage. Irrevocable trusts for asset protection planning cannot accept an IRA since those can only be inherited by a trust after an individual passes away. The Grantor also maintains the right to decide who will get anything from the trust, and when. Beneficiaries can be changed. But the Grantor cannot receive assets from the trust personally. If they could, the state could force assets to be spent down before qualifying for programs like Medicaid.

A pooled trust is a tool often used by senior citizens or those with long term disabilities to qualify for public benefits, such as Medicaid, without having to deplete assets totally. These can be used if the monthly income is too high to otherwise qualify, or to accept assets that you do not want to ‘spend down’ or otherwise transfer away. The only rule is that you have to have a general plan of spending that shows the money in the trust is expected to be spent on the Grantor within their lifetime. Anything that is not spent on them cannot be inherited, and is effectively lost.

Revocable trusts are different than irrevocable trusts because they can be changed or cancelled by the Grantor. These are appropriate for individuals seeking to protect assets for those who should not inherit outright for reasons of age, debt, or other considerations, as well as to minimize the probate process. However, these trust will not protect assets if the Grantor needs long term care. Medicaid eligibility rules would require that all revocable trust assets be spent before eligibility is possible.

A trust for a disabled child or adult protects assets while maximizing benefits eligibility. In many cases, when a person receives government benefits, such as Social Security or Medicaid, gifts or inheritances that they receive can reduce or even eliminate any eligibility for these benefits. If the special needs individual has assets, they can create a trust for themselves, known as a first party trust, and any assets placed in trust will not count as theirs, but can be spent on them. If that is the case however, any leftover assets have to go to reimburse their programs. If someone else creates the trust for the special needs individual that is known as a third party trust. Any remaining assets can be inherited by whoever the grantor decides.