As you approach your golden years, you are well are of the high costs of long-term elder care. You worry that these expenses will deplete your assets not only for your use but also for your children and grandchildren. You are looking for ways to preserve your assets from Medicaid, and you are curious about using a trust.

Irrevocable trusts can be excellent tools to shield your finances from Medicaid—if you know how to use them correctly.

How do irrevocable trusts work?

There are two forms of trusts: revocable, and irrevocable. While a revocable trust allows the grantor to modify the trust, an irrevocable trust does not. When you place assets in an irrevocable trust, you can no longer change or terminate the terms of the trust without legal permission from the trustee. In effect, you are transferring ownership of the assets to the trustee.

Using irrevocable trusts as asset protection

Medicaid is based on income. If your income is not low enough, you will not qualify for Medicaid. Many leads some people to spend down their assets so that they can qualify—but this is not always necessary. When assessing your eligibility, the state considers only some assets, including bank accounts, property, real estate and stocks and bonds. The assets you place in an irrevocable trust will not count toward your eligibility.

However, beware the Medicaid look-back period: this is when the state examines your past finances to see if you deliberately depleted assets to qualify for Medicaid. If it determines that you have, then you may face a penalty or delayed eligibility. If you are planning to use Medicaid at some point in your life, then it is best to plan the use of trusts wisely.