Can a Revocable Trust Protect Assets From Nursing Homes?

Many Florida families create a revocable living trust believing that placing a home, bank account, or investment account in the trust will protect those assets if long-term nursing-home care is later needed.

Unfortunately, a standard revocable trust generally does not protect the person who created the trust from nursing-home expenses, Medicaid eligibility rules, or personal creditors. A revocable trust can be an excellent estate-planning tool, but it is not ordinarily an asset-protection trust.

Does a Nursing Home Actually “Take” Your Assets?

A nursing home does not automatically take ownership of a resident’s home, bank accounts, or other property. The concern is usually how the resident will pay for care.

A resident may pay privately, use long-term care insurance, or apply for Medicaid long-term care benefits. To receive Medicaid assistance for nursing-facility or community-based long-term care in Florida, an applicant must satisfy both medical and financial eligibility requirements. The Florida Department of Children and Families determines financial eligibility, while the CARES program determines whether the applicant meets the required level of care.

When a resident cannot pay a valid nursing-home bill, the facility may also pursue collection like another creditor. Merely transferring assets into a revocable trust does not place those assets beyond the resident’s control or the reach of the resident’s creditors.

Why Does a Revocable Trust Not Protect the Assets?

The key word is revocable.

The person creating a revocable trust—usually called the settlor, grantor, or trustmaker—typically retains the right to:

• Change the trust;

• Revoke the trust;

• Remove assets from the trust;

• Replace the trustee; and

• Use the trust property for his or her own benefit.

Because the settlor still controls and benefits from the property, the law generally treats the assets as though the settlor still owns them directly.

Federal Medicaid law expressly provides that the entire principal of a self-funded revocable trust is considered an available resource of the individual. Payments made from the trust to or for the individual are treated as income, while certain payments made for other purposes may be treated as transfers of assets.

In practical terms, moving a checking account, investment account, or house from an individual name into that person’s revocable trust does not make the property unavailable for Medicaid purposes.

Florida Law Also Allows the Settlor’s Creditors to Reach the Trust

Florida law reaches the same general result for creditor protection.

Florida Statutes section 736.0505 provides that property held in a revocable trust remains subject to the claims of the settlor’s creditors during the settlor’s lifetime, to the same extent that the property would be available to creditors if the settlor owned it directly. The statute applies even when the trust includes a spendthrift provision.

For example, suppose Mary transfers $200,000 from her individual brokerage account into the “Mary Smith Revocable Trust.” Mary remains the trustee and beneficiary and can withdraw the money whenever she chooses.

Although the account is now titled in the trust’s name, Mary has not surrendered control of the money. For purposes of her creditors and Medicaid eligibility, the account ordinarily remains Mary’s available asset.

What Does a Revocable Trust Accomplish?

Although a revocable trust does not generally protect the settlor’s assets from nursing-home expenses, it can still provide substantial estate-planning benefits.

A properly prepared and funded revocable trust may:

• Avoid probate for assets titled in the trust;

• Allow a successor trustee to manage assets during incapacity;

• Provide more continuity in financial management;

• Establish detailed inheritance instructions;

• Hold property for minor or financially vulnerable beneficiaries;

• Reduce the need for court involvement; and

• Provide continuing trust protection for beneficiaries after the settlor’s death.

The distinction is important: a revocable trust can help manage and distribute assets, but it does not ordinarily shield the settlor’s property from the settlor’s own expenses or creditors.

Does Naming a Child as Trustee Create Protection?

Usually not.

Some people believe that their assets become protected if an adult child is named as trustee. The identity of the trustee, however, does not determine whether the assets are available to the settlor.

If the settlor retains the right to revoke the trust, withdraw the assets, or receive distributions, the assets generally remain available. Federal Medicaid law applies its trust rules regardless of the trust’s stated purpose, the trustee’s discretion, or restrictions placed on distributions.

Similarly, requiring two signatures, naming a co-trustee, or stating that the trustee should preserve assets for the family does not necessarily create Medicaid protection.

Does a Spendthrift Clause Protect the Settlor?

A spendthrift clause can sometimes protect assets held for someone other than the person who funded the trust. It generally prevents a beneficiary from assigning a future distribution and may restrict a beneficiary’s creditors from reaching the beneficiary’s interest before distribution.

A person ordinarily cannot, however, place his or her own property in a revocable trust, remain entitled to the property, and then use a spendthrift clause to keep the property away from personal creditors. Florida’s statute expressly makes revocable trust property subject to the settlor’s creditor claims regardless of whether the trust contains a spendthrift provision.

Can an Irrevocable Trust Protect Assets?

A properly structured irrevocable trust may sometimes be part of a long-term Medicaid and asset-protection plan. It is not enough, however, to simply place the word “irrevocable” in the trust’s title.

Federal law provides that if there are any circumstances under which trust principal or income can be paid to or for the applicant’s benefit, the portion that could be paid may remain an available resource. If no payment can ever be made to the applicant, the transfer into that portion of the trust may instead be treated as a transfer of assets.

That means an effective Medicaid-planning trust generally requires the settlor to give up substantial rights. Depending on the trust’s design, the settlor may no longer be able to demand the return of the assets or use the principal for personal expenses.

This loss of access is one of the reasons irrevocable trust planning should not be undertaken without careful legal and tax advice.

The Five-Year Medicaid Look-Back Period

Transferring assets into an irrevocable trust does not necessarily produce immediate Medicaid eligibility.

Federal Medicaid law applies a 60-month look-back period to most transfers made for less than fair market value. Transfers within that period can result in a period during which Medicaid will not pay for otherwise qualifying long-term care services. The penalty is generally calculated using the value transferred and the applicable average cost of nursing-facility care.

This is why advance planning matters. A person usually cannot enter a nursing home, transfer all assets into an irrevocable trust, and immediately qualify for Medicaid without consequences.

Transfers to spouses, disabled children, caregiver children, or others may receive different treatment in narrowly defined circumstances. Each proposed transfer should be evaluated before any deed, account transfer, gift, or beneficiary change is completed.

What If Nursing-Home Care Is Already Needed?

Even when a person is already receiving care, it may not be too late to plan. Available options depend on factors such as:

• Whether the applicant is married;

• The nature and value of the assets;

• The applicant’s monthly income;

• Whether the applicant owns a homestead;

• Whether prior gifts or transfers were made;

• Whether a disabled child or dependent family member is involved;

• Existing long-term care insurance; and

• The applicant’s health and care needs.

Lawful planning may involve permitted expenditures, restructuring ownership, spousal protections, exempt assets, income planning, or other Medicaid-compliant strategies. A plan appropriate for a married couple may be entirely different from the plan for a single or widowed applicant.

Families should obtain advice before making gifts or adding children to deeds and accounts. An attempted last-minute transfer can create a Medicaid penalty, expose property to a child’s creditors, cause tax consequences, or create an unintended ownership dispute.

Is a Qualified Income Trust the Same as an Asset-Protection Trust?

No.

A Qualified Income Trust, sometimes called a Miller Trust, is used when a Florida Medicaid applicant’s gross monthly income exceeds the applicable income limit. It is an income-eligibility tool—not a method of sheltering savings, investments, or real property.

Florida requires a Qualified Income Trust to be irrevocable, funded only with the applicant’s income, and contain a provision reimbursing the State from funds remaining at the applicant’s death, up to the amount of Medicaid benefits paid. Assets should not be added to a Qualified Income Trust.

Having a Qualified Income Trust does not make excess assets noncountable.

Can Long-Term Care Insurance Protect Assets?

A qualifying Florida Long-Term Care Partnership policy may provide meaningful protection.

Under Florida’s Partnership Program, each dollar paid by a qualifying policy for covered long-term care expenses can protect a corresponding dollar of assets from Medicaid spend-down requirements. For example, if a qualifying policy pays $100,000 in benefits, the policyholder may potentially protect an additional $100,000 of assets when later applying for Medicaid, assuming all other eligibility requirements are met.

Long-term care insurance is generally most practical when purchased before significant health problems arise.

Does a Revocable Trust Avoid Medicaid Estate Recovery?

A revocable trust should not be relied upon as a Medicaid estate-recovery avoidance strategy.

Florida’s Medicaid Estate Recovery Act permits the State to file a claim in the probate estate of a deceased Medicaid recipient for qualifying Medicaid benefits paid after the recipient reached age 55. The statute includes exceptions and restrictions when the recipient is survived by a spouse, a minor child, or a blind or permanently disabled child, and it does not permit enforcement against property exempt from creditor claims.

Although trust-owned assets may avoid direct probate administration, Florida law can require a revocable trust’s trustee to provide funds needed to pay the expenses and obligations of the settlor’s estate when the statutory requirements are satisfied.

Accordingly, simply transferring assets into a revocable trust does not guarantee that those assets will be protected from all claims after death.

The Bottom Line

A revocable living trust is valuable for probate avoidance, incapacity planning, and inheritance management. It generally does not, however:

• Make assets unavailable for Medicaid eligibility;

• Protect assets from the settlor’s nursing-home bills;

• Prevent the settlor’s creditors from reaching nonexempt property;

• Eliminate the five-year look-back period; or

• Automatically prevent Medicaid estate recovery.

Effective long-term care planning often requires coordinating estate planning, Medicaid eligibility rules, creditor protection, tax considerations, insurance, and family circumstances.

The earlier that planning begins, the more options a family is likely to have.

Speak With a Florida Estate-Planning and Elder-Law Attorney

The Warnock Law Group assists Florida families with revocable trusts, incapacity planning, long-term care considerations, Medicaid-related estate planning, probate, guardianship, and trust administration.

Before transferring a home, changing account ownership, gifting assets to children, or creating an irrevocable trust, obtain advice based on your specific assets, family circumstances, and long-term care goals.

Contact The Warnock Law Group at 239-437-1197 to schedule an estate-planning consultation.

This article is for general informational purposes only and does not constitute legal advice. Medicaid rules, financial eligibility limits, and planning options may change. The appropriate strategy depends on the individual facts and the law in effect at the time of application.