Irrevocable Trusts May Not Be the Best Solution to Avoid Nursing Home Expenses

03.04.2025

Author:  Thomas J. Casey

An irrevocable trust is a legal agreement that transfers assets to a trustee.  It is “irrevocable” because the trust cannot be changed or amended by the grantor (sometimes called the “settlor”).  Many people are interested in irrevocable trusts as a means of protecting assets from creditors, and more specifically, to protect assets from nursing home expenses.

Once assets are transferred into an irrevocable trust, the assets are no longer in the settlor’s estate, and therefore, not subject to the “reach” of nursing home expenses.  Medicaid considers any assets that have been transferred into an irrevocable trust as a “divestment.”  A Medicaid divestment occurs when an individual transfers income or assets for less than fair market value.  Divestment is significant because it can affect an individual’s eligibility to receive Medicaid assistance for long-term care benefits – like paying for the nursing home.  Medicaid only considers divestments made within five years from the time of applying for assistance.  There is a five-year lookback period for Medicaid divestment purposes.  In other words, assets that are transferred within five years from the time of applying for Medicaid benefits, are subject to nursing home expenses.  After five years, those assets are no longer subject to any nursing home expenses.  A transfer of assets into an irrevocable trust is sufficient to qualify as a divestment of the assets as the transferor is giving up any control over the assets.

For most people, the possible benefit of qualifying for Medicaid by placing assets into an irrevocable trust is outweighed by the disadvantages.  Those disadvantages include the following:

  1. Total loss of control of those assets. In an irrevocable trust, someone other than the settlor is named as the trustee, and the settlor can no longer make decisions regarding spending or using the assets.
  1. Lack of opportunity for “step-up” in basis. Because the assets of an irrevocable trust are not includible in the settlor’s estate, those assets do not quality for a “step-up” in basis.  This is a potential huge loss for the settlor and the settlor’s heirs.

For example, if a person dies owning an asset that has a current value of $200,000.00 but a tax basis of $100,000.00, that person’s heir(s) (spouse, child, etc.) would be entitled to a “step-up” in basis, meaning that the heir’s new tax basis would be equal to the value of the asset at the time of the person’s death.

If that asset were to be sold for $200,000.00, there would be no capital gains tax.  However, if the asset was in an irrevocable trust, no “step-up” in basis would be allowed.  Then, if the asset was  sold for $200,000.00 without the “step-up” in basis, a gain of $100,000.00 would have to be recognized resulting in a tax of approximately $15,000.00, more or less, depending on the heir’s financial circumstances.

  1. Cost of setting up an irrevocable trust and overall need to prepare for nursing home expenses. Irrevocable trusts are somewhat complicated and can be expensive to draft.  There is also some question as to the need to prepare for nursing home expenses.  Statistics show that only 1 in 10 people will require nursing home care for an extended period of time.  That means that a substantial majority of us will not need to worry about nursing home expenses and our estate planning should probably address those issues that are more likely to be faced.  Placing assets into an irrevocable trust may not be the most prudent option and careful consideration should be given before doing so.

Talking with an informed and qualified attorney would be a good idea before spending money on an irrevocable trust.