An Irrevocable Trust that Protects your Assets from Probate, Creditors, and Medicaid

Among the misconceptions, I hear from clients, the following is one of the more troubling: a revocable living trust provides not only creditor protection, but also serves to shield trust assets from being counted by Medicaid should they need long-term care. 

 Revocable living trusts serve a very important estate planning function, primarily as a device that shields trust assets from probate during life (adult guardianship) and probate at death.   Illinois law, however, does not protect assets held in a revocable living trust from the grantor’s creditors, and trust assets are fully countable when determining eligibility for Medicaid, the primary payer of long-term care when an individual no longer has countable assets.

 In its simplest form, an individual (the Grantor or Settlor) creates a revocable and amendable trust agreement naming himself as the Trustee and beneficiary.   This trust is sometimes referred to as a “revocable living trust” or RLT.    After the trust agreement is signed, the Grantor may “fund” the RLT by retitling assets to the name of the RLT.  For example, the Grantor tells his bank to change the name of the savings account presently titled in the Grantor’s name alone, to a new name:  “Grantor, as Trustee of the Grantor’s RLT.”   By taking this step, the Grantor is converting the savings accounts from “probate” ownership (an asset titled in his name alone) to “non-probate” ownership” (an asset titled in the name of his RLT.)   During the Grantor’s lifetime, the IRS ignores the RLT for tax purposes and the Grantor continues to control the trust assets.  Since the Grantor still benefits from the assets in the RLT, his creditors can still reach the assets and Medicaid will still count the trust assets as available to the Grantor.

 Alternatively, the Grantor could create an irrevocable trust, relinquishing his ability to amend or revoke the trust.  If the Grantor conveys assets to the irrevocable trust, the trust assets would avoid probate in the same way as assets in a RLT avoid probate.  However, under Illinois law, an irrevocable trust under which the Grantor retains access to the principal, as a beneficiary of the trust, would not be protected from his creditors and the trust assets would be countable when determining eligibility for Medicaid.

However, if the Grantor relinquishes his right to principal, then such assets held in the irrevocable trust would not be reachable by his creditors (provided there was no creditor issue upon the creation of the trust) and assuming the applicable look back period had expired, the trust assets would not be countable by Medicaid in determining eligibility for Medicaid to pay for long term care.

 Even though the Grantor beneficiary cannot benefit from the principal of the irrevocable trust, the grantor beneficiary can receive all the ordinary income (interest, dividends, rent, and royalties), and the right to live in any trust-owned real estate. The irrevocable trust can be drafted to assure that the Grantor can take the capital gains exclusion should the primary residence held in the irrevocable trust be sold.   The primary residence, vacation homes, or rental properties are often ideal assets to fund this type of trust, particularly those properties that the client intends to hold for many years..

 Sometimes this type of trust is called an “irrevocable income only” trust or more popularly, the Living Trust Plus™. 

Nursing Home sued husband and his wife for failure to pay for over $134,000 for husband’s care and treatment.  Neither the husband nor his wife signed the contract outlining the services to be provided and the costs.  The Nursing Home sued Husband for breach of contract and sued the wife under the Family Expense Act.   The Nursing Home also sued the Husband based on quantum meruit.  Quantum meruit is an equitable claim founded on the implied promise of the recipient to pay for valuable services rendered, or otherwise the recipient would be unjustly enriched.

The Appellate Court approved the lower court’s dismissal of the breach of contract claim finding that the Nursing Home Act (the Act) requires that a written contact between the facility and the patient be “executed” which was not the case here.    The appellate court also concurred with the lower court’s dismissal of the family expense complaint finding that the action against the Wife was dependent on her husband’s underlying liability under the written contract and since the unsigned contract was unenforceable under the Act, no action under the Family Expense Act could proceed.

The Appellate Court did allow the complaint in quantum meruit to go forward.  Courts have refused to allow recovery under quantum meruit if the underlying contract violated public policy, but an action in quantum meruit can proceed in a situation where the formation or execution alone makes the underlying contract unenforceable.  The court noted that there was no assertion that the care provided to the husband was unsatisfactory. Consequently, the case is being returned to the lower court to allow the Nursing Home to demonstrate the services it provided and the reasonable amount it seeks to recover.   The Carlton at the Lake, Inc., Plaintiff-Appellant, v. Robert Barber, Individual, Defendant-Appellee., No. 07 L 8747, on appeal from the Circuit Court of Cook County, Illinois, decided on May 20, 2010.