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                                                 Baird B. Brown             Clara Brown Shaffer              Shauna C. Clemmer                    Daniel F. Fitzgerald

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            "Accumulating wealth is one thing. Preserving it is another. Let our family help yours."                                                                                                                                                                           

Special Report

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                                                                                Issues With Using Irrevocable Trusts For

                                                   Medicaid Planning In Colorado

 

What is an irrevocable trust?

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An irrevocable trust is a legal arrangement where assets are transferred from an individual (the grantor) to a trust managed by a trustee for designated beneficiaries. Once established, the terms cannot be altered or revoked. This means you permanently relinquish ownership and control of assets. For Medicaid purposes, you cannot access or benefit from trust assets without compromising Medicaid eligibility.

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Why are Irrevocable Trusts (sometimes referred to as Medicaid trusts) used?

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Colorado Medicaid imposes a 5-year lookback period for all asset transfers. Any gifts or transfers for less than fair market value during this period may trigger a penalty period during which Medicaid benefits are denied. Assets transferred to an irrevocable trust are considered a gift.

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Example: If you transfer a $500,000 home to an irrevocable trust and apply for Medicaid before the 5-year lookback period expires, you could face a penalty period of approximately 4 years.

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Irrevocable trusts have been used for five-year Medicaid planning purposes. Sometimes they are referred to as “Medicaid Asset Protection Trusts” or a “Family Trust” to protect assets for Medicaid purposes. The idea is you transfer a large gift, such as a house, to the irrevocable trust. Then you do not apply for Medicaid for 5 years (to get past the lookback period). The asset in the trust then goes to your beneficiaries upon your passing rather than having to be spent down or available for Medicaid estate recovery. Estate recovery is when Medicaid files a claim in an estate for the amount of care that has been provided after the recipient of Medicaid benefits dies.

 

What are some issues with irrevocable trusts for Medicaid planning in Colorado?

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1. Complete Loss of Access to Assets

  • Assets transferred to an irrevocable trust are no longer available to you - neither income nor principal.

 

  • Any attempt to retain benefits may cause Medicaid disqualification while at the same time leaving you unable to access those assets.

 

  • This creates a worst-case scenario: being disqualified for Medicaid while simultaneously unable to use the assets for your care.

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2. Home Transfer Issues

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  • If your home is transferred to the trust, you must pay fair market value rent to continue living there to support the argument you have made a gift. If a transfer is not considered a completed gift then it will be considered a resource making the applicant ineligible for Medicaid (as it is in a trust and not considered exempt).

 

  • Failure to pay fair market rent may cause Medicaid to count the trust assets (the value of the residence) as an available resource.

 

  • You cannot take the home out of the irrevocable trust if problems arise.

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3. Loss of Step-Up in Basis

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  • Property transferred to the trust will retain your original basis. This loses the valuable step-up in basis that would occur if assets were inherited at death.

 

  • Can result in significant capital gains taxes for your heirs when trust assets are eventually sold.

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4. Five-Year Lookback Vulnerability

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  • The 5-year waiting period creates substantial risk if care is needed sooner than anticipated. Medical conditions can progress unexpectedly, making accurate timing impossible.

 

  • Legislative changes could occur during the 5-year waiting period, potentially extending lookback periods or increasing penalty calculations.

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5. Colorado's Unique Trust Treatment

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  • In Colorado, assets kept in a trust established for Medicaid qualification purposes may not be recognized as a valid trust at all.

 

  • Colorado Department of Health Care Policy and Financing scrutinizes trusts carefully.

 

  • Trust provisions acceptable in other states may be problematic under Colorado's stricter interpretation.

 

 

Conclusion:

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Any type of five-year planning is inherently risky as we do not know if there will be law changes or significant unforeseen expenses. Planning with irrevocable trusts in Colorado is likely to cause additional issues as stated above. The federal and state Medicaid program has made it difficult to gift assets away and then try to qualify for long-term care Medicaid. There is a strong emphasis in the law on having the applicant spend down resources on care prior to applying for Medicaid. While there are some planning techniques that can be used to try to preserve resources, they should only be done with the advice of counsel that is well versed in the area of long-term care Medicaid planning.

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