The Elder Law Coach

Epi 51: When To Use (And When NOT To Use) Irrevocable Trusts For Your Clients

• Todd Whatley

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Todd Whatley tackles the complex topic of irrevocable trusts in elder law practice, focusing primarily on Medicaid Asset Protection Trusts and when they're appropriate for clients. He draws on personal experience to provide practical guidance on implementing these powerful legal tools correctly.

• Irrevocable trusts require relinquishing control and ownership of assets, making them subject to Medicaid's five-year lookback period
• Many attorneys incorrectly structure these trusts by making the grantor a trustee or beneficiary, which can invalidate the protection in some states 
• Medicaid Asset Protection Trusts are generally best for higher net-worth individuals with sufficient assets to cover needs during the lookback period
• Always implement a "cooling off" period before finalizing an irrevocable trust to ensure clients fully understand and commit to the arrangement
• Consider additional trust applications including charitable remainder trusts, Domestic Asset Protection Trusts, and irrevocable life insurance trusts
• Client communication and education are crucial – never recommend these tools without ensuring clients understand the loss of control and benefits
• Evaluate asset types carefully – retirement accounts typically make poor candidates for trust funding due to tax consequences
• Family farms and generational properties often justify irrevocable trust planning even with modest estates

For help implementing these strategies and for coaching opportunities, visit TheElderLawCoach.com or call to schedule a consultation.


Check out our new website www.TheElderLawCoach.com.

Speaker 1:

Thank you. Specialized experience, Whether you're an established attorney looking to refine your expertise or an emerging lawyer seeking a successful foray into elder law, this is your masterclass. Now let's get started with the luminary in the field. Here's Todd Whatley.

Speaker 2:

That's right. This is the Elder Law Coach podcast. My name is Todd Whatley and I am, as always, very thankful that you are here, and today we're going to cover a topic that I have seen become very popular over the last year or so. I've been using these for quite some time and I see estate planning attorneys, and particularly some elder law attorneys, learn about these and they're like ah, this is the cure-all for everything and it is not. What I'm talking about is an irrevocable trust, particularly. I'll spend most of my time talking about the Medicaid Asset Protection Trust, but I will also mention a few other trusts and just talk about when those should be used and when they should not.

Speaker 2:

Okay, so just in case you're not familiar I mean, you obviously you're an attorney, you know what an irrevocable trust is, but let me just give some foundational definitions just so you can understand. And irrevocable trust is basically a legal arrangement where the grantor transfers assets into the trust and relinquishes control and ownership, and that is crucial when you're dealing with the Medicaid Asset Protection Trust and, like I tell clients, this is kind of set in stone. Now, we as attorneys never create an irrevocable trust that can't be changed somehow. I just tell them. It is quite difficult to change. So once we do it, it's pretty much set Okay. The purpose of an irrevocable trust typically is asset protection, tax planning, medicaid planning and some estate planning. There are many, many misconceptions here. So many attorneys and some of the public assume that an irrevocable trust is very rigid, overly complicated, and they can be, and they should be to some point. But there are some substantial benefits to giving up control, giving up the benefit from that trust. Okay, all right. Some common scenarios where you will see irrevocable trust okay, where they are appropriate.

Speaker 2:

Okay, like I said, probably the number one way that I use irrevocable trust is with Medicaid and long term care planning. Done correctly, this will protect the assets while qualifying for Medicaid. It gets the assets away from your estate according to Medicaid, so that they're gone, they're out there and Medicaid cannot come after them. They're out there and Medicaid cannot come after them. Okay, now, since you are relinquishing control of those assets, then that is seen as a gift and therefore you are subject to the five-year look back. Okay, and you need to be aware of that.

Speaker 2:

That's where I see a lot of attorneys messing up is someone comes in with a house and $100,000, $200,000 in the bank and investments and they're like oh, we need to protect the house, so we put the house into an irrevocable trust. Well, that's great if you can make it five years. But the problem is I'm pretty conservative on this and the last thing I want is for my client to do this and then have a stroke next week and need nursing home care for the next five years. You don't have enough money with one or $200,000 in the bank to cover five years worth of nursing home care and, if done correctly, you should not be able to give that house back to the person. One thing on this let me just kind of take a detour very quickly is when you do this, you need to be careful, because some states and I live in one that is very particular about this they have made it clear that if your state allows you to reduce a penalty I'm pretty sure all states allow you to eliminate a penalty. If you give back all of the assets, that will eliminate the penalty.

Speaker 2:

But here's the key thing my state, arkansas, is very particular that the gift has to be returned from the person or the entity that it was gifted to, and the terms of an irrevocable asset protection trust is that the grantor, the Medicaid applicant, is not the beneficiary of this trust, and so therefore it is a violation of the terms of the trust for the trustee to transfer the home from the trust back to the applicant. The trust says you can't do that. And I can see Medicaid saying you can't do that. You can't give the house back. You put it into an irrevocable trust where the grantor was not the beneficiary. You're stuck with it, and in some states you might be able to transfer it from the trust to the lifetime beneficiary, one of the kids, and the kid give the house back to the parent and kind of argue with Medicaid that hey, you know, this is the house that was gifted to the trust and now it's back in their name. Well, I still think Medicaid can say nope, this was given to the trust and the trust did not give it back. So therefore we are not recognizing the reduction or elimination of the gift. You see, that's where a lot of people jump into these and they do it quickly and they think, oh, this is the cure-all for everything and it's not. You have to be careful about this Now. Then there's the other issues of who's the trustee, who's the beneficiary.

Speaker 2:

I do a public speaking event every first Thursday at this one place public speaking event every first Thursday at this one place and the director of this place brought me a local caregiver or caregiving in Arkansas and it's a magazine that you can buy ads in and it has articles. And one of the advertisers was an elder law attorney in Arkansas and he wrote an article in the director of this facility, he's a physician. And he said the director of this facility, he's a physician. And he said I want you to read this article and tell me if you agree with the determinations of this attorney. And I kind of looked at him. He said I'm just curious what you think. I was like okay, and so I had finished my event and I needed to get back to the office. So he just gave me the magazine and so I got back to the office and I read it and I was like, oh no, this is an Arkansas attorney who I have been told by the state that if you have a trust where the applicant is the trustee or the beneficiary in any way, it is a countable asset.

Speaker 2:

I've been told that I don't risk it. My irrevocable trust makes the grantor and the future Medicaid applicant, not the trustee and not the beneficiary in any way whatsoever. This guy's doing trust, with the grantor as the trustee and they have income benefits from the trust. And I've been told by DHS that, even though it really doesn't follow federal law, that they have told me that they're going to deem it to be a accountable resource and we can fight it out in court, which is a two-year fight while the nursing home bill's building up and we don't know that we're going to win. And so I am very conservative on this. I will fight and fight and fight on things that I know I'm right and I know that I should win, but on this topic I don't know that and I don't want a two-year fight over this issue that I'm not absolutely sure on. And it's an easy fix you just tell your client you're not the trustee, you're not the beneficiary and boom, it is absolutely protected from Medicaid once you do that, okay, but this guy's doing this, and that gets into the issue of whatever goes into. The trust can't come back to the grantor and therefore you can't reduce or eliminate the gift and you're stuck with this gift regardless. And so please be careful when you're doing these.

Speaker 2:

I reserve these for higher net worth people. In Arkansas, nursing homes are no more than $10,000 a month. Easy number to calculate that's $600,000. When you factor in income, that reduces that maybe down to $400,000, $ $500. So generally I don't do an irrevocable trust Medicaid Asset Protection Trust unless it is worth it. There are enough assets for us to be able to put enough in there for the trust to make sense and keep out about $400,000. Okay, and that does vary depending on income, but I feel safe. The client doesn't feel broke, they can go on vacation, they can buy a new car, they can do what they want to with that $400,000, knowing that every month they get through this five-year penalty that's $10,000. They, knowing that every month they get through this five-year penalty that's $10,000 they don't have to pay and so basically they can spend 10,000 bucks a month within reason and know that they've got enough money to get them through the remainder of the five-year. Look back Okay. So that's my spiel on the Medicaid Asset Protection Trust.

Speaker 2:

Now there are some other irrevocable trusts and we use those sometimes in estate planning just pure estate planning, not so much Medicaid. And this tends to come into play with your high net worth people a trust that you can transfer assets into. That are either seen as gifts or you can make it so that you're within the annual gifting exemption and you don't have to fill out gift tax returns and it doesn't reduce your lifetime exemption. And so there are some trusts there and, particularly when one spouse passes away, you want the lifetime exemption or a portion of it to go into an irrevocable trust so that it is outside the estate of the surviving spouse and you can save a whole lot of taxes. You basically double the exemption amount and you can put some terms on that so that the surviving spouse can benefit from it, but it is outside of their estate.

Speaker 2:

Some states have what are known as the Domestic Asset Protection Trust. Arkansas has just fairly recently, created that. I have not done one yet. I am researching it and I'm starting to mention that to clients as an option, and it is simply what it says. It's you're able to put your assets in there and it is protected from creditors, bankruptcy, divorce, things like that. After two years you can't do it, knowing that there's a debt and that protection does not kick in for two years, and so that's really good for high risk professionals, physicians, some attorneys, business owners, people like that. This domestic asset protection trust, which is obviously irrevocable, is a huge component of some people's estate and the benefit of protecting from creditors is huge in depth.

Speaker 2:

But a lot of times, particularly after the death of the parents and they leave their estate into a special needs trust, that trust becomes irrevocable so that the trustee can't change it, can't mess things up, can't pull the money from any so that the money benefits anyone other than the disabled person. I will leave those revocable during the lifetime of the parent, particularly because there's not much money in it. We create it. It's there, ready, willing and able to accept money. But typically if the parents are alive, they're just going to do things for their disabled child. They don't need the trust. But it's there and if someone else wants to leave money into it, a lot of times I'll do this cool little trick that I think elder counsel taught me. This is make the trust revocable and if someone else wants to leave money into the trust, you can put language in the trust that says if this trust accepts over $25,000, $50,000, whatever that number is, then even during the life of the parents it becomes irrevocable. That way the grandparents and uncles, somebody can say, hey, I would love to leave money to this disabled child, but I'm a little nervous because it's revocable. And if I leave it in there and it's revocable, the parents can cancel this trust, pull the money out of the trust for their benefit and not for the child. And so, therefore, to fix that hesitation, we'll put language in the trust for their benefit and not for the child. And so, therefore, to fix that hesitation, we'll put language in the trust that says this trust becomes irrevocable once a set amount of money goes in. We don't want someone putting in $5,000 and having to lock it down. It needs to be a substantial amount of money. It's like, hey, if you're going to be serious about this, $25,000, $50,000, whatever, that's the number.

Speaker 2:

I have also recently started, just because I've just never had clients that, to be honest, I didn't fully understand these. I knew what they were, but I did not understand them, and so therefore, I did not recommend them since I did not understand them. Now, working with a financial advisor very closely, we have done a number of charitable remainder trust or charitable lead trust, basically just charitable giving and irrevocable trust that you can put highly appreciated assets into and therefore not have to pay the capital gains benefit from those assets during your lifetime and then it ultimately goes to a charity at the time of your death and those can save people hundreds of thousands, if not millions of dollars, in taxes and do what they want. And particularly if a client comes to you and they mention I really want to benefit some charities, that's great. Okay, let's benefit charities. But benefiting charities at death is great, but you don't get a tax benefit for that. Why not? Let's do it now. Or let's still benefit the charity at your death, but let's get a tax benefit for that today and you still benefit from that money today.

Speaker 2:

If that doesn't make sense to you, I probably should do a full podcast just on that topic, because once I learned about it, it really opened up the doors and allowed me to, within my fiduciary duty to my client, say hey, do this trust? This is a trust, that tax deduction charitably oriented, you get the income off of it, you don't have to pay taxes on this. Now. I mean, it's just a beautiful, beautiful tool and if you don't fully understand it or you don't have a financial advisor who fully understands it, give us a call because we can definitely walk you through that, okay. And then finally, probably one of the most popular irrevocable trusts is the irrevocable life insurance trust. Those are beautiful tools also, particularly for people with a taxable estate, and you're not going to see that a lot.

Speaker 2:

But there are some people out there today 2025, who have over $28 million and therefore they're going to have a tax bill. There is not a lot we can do to prevent that, and the problem is. The problem this solves is you know, you're going to have a tax bill and say, someone dies and they owe $10 million worth of taxes. They have a $50, $60 million estate. Well, a lot of these people, their wealth is not money sitting in a bank. Their wealth is real estate, business ventures, things like that, things like that.

Speaker 2:

And for the family to have to come up with $10 million within nine months of your death can be difficult. You're having to sell $10 million worth of property, kind of in a fire sale, to get it sold and closed and the funds transferred. That's going to be difficult and could be expensive, because to generate $10 million from that, you may have to sell $15 or $20 million worth of stuff. Well, that's greatly reduced the estate of this person, whereas if you just have an irrevocable life insurance policy, it's got to be irrevocable because life insurance is part of your estate unless it is in an irrevocable trust. So therefore, you buy a $10 million. Life insurance is part of your estate unless it is in an irrevocable trust. So therefore, you create this, you buy a $10 million life insurance policy, put it into this irrevocable life insurance trust. So now, at your death, $10 million goes into the trust. The kids can use that $10 million, pay the tax, tell the IRS to move on down the road, and the assets of the estate don't have to be liquidated. Super cool, super nice, and it can really help families out. So that's when irrevocable trusts are good.

Speaker 2:

Okay, I kind of went off on a tangent on the Medicaid asset protection trust, but here is a list of why irrevocable trusts may not be appropriate. So, number one client hesitation. I do something very weird that people are like really, but I can tell you, I've been there, I did it the other way and it bit me, and so I decided after about the second or third of these went south on me, I was like I am not doing this anymore. Here's the way that I'm going to do it. And so here's the way I do when someone comes into me and they want to do like the Medicaid Asset Protection Trust, I explain it to them and they're like absolutely, let's do that. That's the best idea I've ever heard of, let's do it. And I'm like nope, not today.

Speaker 2:

This is an irrevocable trust. You can't change this very easily. You are losing control, you're losing benefit of this. It's a great tool. I highly recommend it, but I want you to think about it. I want you to go home. We're going to schedule an appointment in two or three weeks. I want you to sleep on it. Come back in two or three weeks. You're probably going to have some questions. You're going to think about some things. Let probably going to have some questions. You're going to think about some things. Let's have another meeting and let's talk about it. And if at that meeting, after I answer your questions or we discuss it further, and you still want to do it, absolutely let's do it.

Speaker 2:

Losing three weeks in a five-year time you know, look back is not that much, and the reason I do that is there were quite a few of these that I sold and they're like absolutely, let's do it. I'm like okay, pay me half the fee and then we'll pay the other half. And so I go off and I start doing it. I do the trust, I spend the time and effort of drafting this trust, getting it absolutely right, and then, a week or two later, they call me. It's like yeah, I thought about it and one of the big reasons is they talked to their financial advisor and they're like yeah, I don't think I want to do that. I changed my mind.

Speaker 2:

You're like well, and I charge a chunk of money for this? Okay, generally $7,500. And so they just paid you $3,750, $3,750. You're like well, the contract says I've earned this first half, so sorry. And they're like what, you haven't done anything for me. I want my $33,750 back. You're like no, this is worth a contract. And they're like oh, this is ridiculous and it's a fight.

Speaker 2:

Okay, and you either keep the money and have an angry client out there dissing you on Facebook and leaving a bad Google review and everything, or you refund the $3,750 after you've already spent a number of hours on this. That is all easily solved by not letting them sign up on day one. Okay, tell them, I appreciate your enthusiasm, but I want you to go think about it and the flip side of that. When you bring this up to a client and they're like I don't like that idea, okay, well, I just thought I'd bring it up. But you understand, you lose control, you lose benefit and you don't like that. Okay, but please remember.

Speaker 2:

And what I would say when someone says I don't like that, tell them look what's in the trust will be protected from Medicaid and will go to your heirs. Okay, I want you to just think about that. Yes, you've spent the last decade or so knowing that you have $3 million, $4 million, $5 million in the bank. Okay, I cannot get you qualified for Medicaid with $3, $4, $5 million. All right, or at least anytime soon. Okay, you will pay for five years, but with this trust I can get you down to be much more reasonable and I can get you on Medicaid and get the rest of this money to your spouse or we can if you're single, we can apply and get you on Medicaid in less than five years if you'll do this trust. But understand, you don't want to do it, you don't like it, but just understand everything in this trust. But understand, you don't want to do it, you don't like it, but just understand everything in this trust will be protected for your kids. And that last thought in their head when you tell them that they're going to think about that.

Speaker 2:

And I've had a number of clients who were staunchly no, can't do it, don't want to do it, I just can't see myself not having three or four million dollars in the bank. Ok, I get that. A week later, six weeks later, six months later, sometimes years later, they'll call back and say you know, I thought about it and I don't need four million dollars. I'm 75 years old, I'm not going to go to Europe anymore, I'm not doing this or that or whatever. If I have three or four hundred thousand dollars, that's all the money that I would ever need. I'll take that so that I know that my estate will go to my kids. And you're like OK, come on in and let's discuss it.

Speaker 2:

And generally those people, once they come back in, they are very dedicated. You can go in, get on it, do it and keep your fee. Ok, so I've had it both ways. Absolutely yes, let's do it. And then a few weeks later, no, don't want to do that. And people are like oh no, absolutely not, I'm not doing this. A few weeks later it's like, yeah, I think that's a good idea, actually. Okay, good, here's some key things.

Speaker 2:

I'm looking at my notes here. Number two clearly, insufficient assets. I think this is where people get all gung-ho and they put people that don't have sufficient assets into the trust. High cost and complexity may not justify the use for clients with modest estates. They need to have enough assets for this to make sense, okay. Another client that this is probably not good for is someone who lacks long-term goals. Okay, this is a very long-term play. I mean, this is irrevocable and it's done, and so you have to think long-term. And if someone's not thinking long-term, that's why, typically, I don't sell these to anyone under the age of 70.

Speaker 2:

Just to be honest, medicaid I said protection trust. Most people in your 50s and 60s are like I don't know, and that makes sense because chances are they're still 10, 15, 20 years away from long-term care. We can do something later. Sometimes this trust is just simply unnecessary for their current needs. There are some people that if they don't want to give up money, they don't need Medicaid. They never want to qualify for Medicaid because they have enough money to self-fund.

Speaker 2:

There may be better alternatives Gifting of smaller estates hanging on to it until you need Medicaid and we can get one spouse on Medicaid and keep everything for the other spouse. And sometimes that other spouse has long-term care insurance. So therefore, we can get one spouse on, get them on Medicaid, having all of the other assets to the other spouse, and if that spouse has long-term care insurance, we don't need to apply for Medicaid. We don't have to do the gift and return or annuity or whatever. So just look at all of the alternatives and do what's in the client's best interest.

Speaker 2:

So key factors to evaluate whether you need this trust or not. So net worth asset types if all of their assets are in 401ks or IRAs, an irrevocable trust is not going to be good because that's a taxable event. Okay, so you know, sadly there's been people with what I call moderate estates. You know 1 million, 1.5 million, but it's all in IRAs. I'm like there's just you're going to have a hard time qualifying because there could be a huge tax bill here and we definitely don't want to do this trust because that's going to be one huge tax bill immediately and it's just not worth it.

Speaker 2:

I will say where this works and even if the client doesn't have a lot of money. The family's just going to have to work it out somehow is if there's the prime family farm, family property that's been in the home for generations and the parents don't live there. They've moved away from that, moved into town and they are now living in another house and this is non-home property. It will cause them to be disqualified from Medicaid. But the family doesn't want to sell. It's like we've got to keep this.

Speaker 2:

That's a perfect example of an irrevocable trust, an asset protection trust for Medicaid. You tell the family multiple times in writing. You have to understand putting this farm into this trust means mom and dad will not qualify for Medicaid. And I've even had some fun with clients and I said, hey, this is the cheapest long-term care policy that you'll ever get. And they're like what does that mean? I said, well, for $7,500 for this trust, we're going to put the farm into this trust. You can't qualify for Medicaid for the next five years and the kids really want to keep this farm, so they're going to do something. They're going to pay money or they're going to keep you or do something, but they're going to pay. You're going to have five years of long-term care here for only $7,500. They're like I like the way you think I said yeah, I know, realize what the client's objectives are.

Speaker 2:

You've got to talk to your clients. Let your clients talk to you and figure out what their objectives are. You have to know your state rules. That's why I'm concerned about that attorney who wrote this article in this magazine. I'm not sure this guy fully understands the Medicaid rules. I plan to communicate with him and see if he knows something. I don't, which I would be very surprised, but that gives me concern.

Speaker 2:

Okay, also, look at the long-term impact of this. Do the families get along? What are going to be some of the pitfalls of this? Unintended tax consequences, future needs, liquidity, things like that have to be considered before you do this. All right. So, in summary, the benefits asset protection and credit shielding, tax efficiency for high net worth clients and long-term care planning, security for specific family needs, long-term care, nursing home, home care, things like that. Some of the drawbacks Inflexibility.

Speaker 2:

It is difficult to change the terms of irrevocable trust, potential or unintended consequences, tax implications, grand tour, loss of access. You have to make sure that they understand that, and there can be some administrative complexity. Tax planning expenses can be significant on these, and so you have to make sure that these people understand this. Client communication is crucial here. You've got to make sure the clients understand this and that's why I say don't let them hire you on the first day. You have to make sure they understand that and I sometimes will follow that up with a letter explaining the benefits and the drawbacks of this trust, so that they have it in writing and they understand but they don't make a rash sudden decision. If you're not familiar with trust protectors, those are fantastic. That's one of the ways we can fairly easily change an irrevocable trust.

Speaker 2:

So look into the trust protector provisions and powers of appointment in case one of the beneficiaries of this irrevocable trust has problems. I had one where the person had a major car wreck and was in a nursing home and was on Medicaid and our trust was just. It left it in trust, but it left it in a general needs special or, I'm sorry, it left it in a general needs trust for the benefit of that person, which would have kicked them off of Medicaid. And so my client calls me. It's like, oh no, I've got this irrevocable trust and she had about $3 million and so $1 million was going to go to each child. $1 million going to this child that was now on Medicaid was going to be a problem, so therefore, we did a power of appointment where, at her death, his share went to the other two siblings rather than to him. Problem solved.

Speaker 2:

You really need to encourage your clients to collaborate with financial advisors, tax professionals and, if you're not an elder law expert, get with an elder law expert who understands the ramifications of Medicaid and how this works. You've got to stay educated on these. A lot of the software companies do continuing education courses on this all the time and I encourage you stay up to date with it. It's a super cool tool, but it can also be messed up very easily. All right, continue to think about this.

Speaker 2:

Think very critically and don't throw this at every client. It's not for every client. Use it judicially, and when you do it's really fun. It solves a lot of problems, the clients love it and, if done correctly, it's not going to blow up on you later on. All right, I hope this helped. Okay, please let me know if you have any questions or concerns. Todd, at TheElderLawCoachcom, I would love to be your coach and if you would like to dive into this even deeper and have me as your coach. I would be very honored. Call the office, call Tricia, I'll put her number in there. Or just go go to the website, the elder law coach dot com, and there's a place there that you can schedule online and I would love to talk to you and we will see you next time, ok, thanks.

Speaker 1:

Thank you for joining this episode of the Elder Law Coach podcast. For those eager to take their elder law practice to new heights and are interested in Todd's acclaimed coaching program, visit wwwtheelderlawcoachcom. With Todd Whatley by your side, the journey to becoming an elder law authority has never been more achievable. Until next time, keep learning, keep growing and stay passionate about elder law.