A revocable trust is an estate planning strategy you may want to consider. Revocable trusts allow individuals to manage their assets during their lifetime while also ensuring that those assets will be distributed according to their wishes after they pass away. Among the benefits of a revocable trust are the ability to avoid probate, the ability to protect assets, and the ability to maintain privacy.
The 5-year look-back period is an important aspect of a revocable trust that you should be aware of. Throughout this article, we will explore the 5-year look-back period and how it affects estate planning.
What is a Revocable Trust?
In the context of estate planning, a revocable trust is a legal entity created during one’s lifetime. Assets can be transferred into the trust and managed by you as a trustee. During your lifetime, you may also make changes to the trust or revoke it altogether. Upon your death, the assets in the trust will be distributed according to the terms of the trust.
What is the 5-Year Look Back Period?
Medicaid’s 5-year look-back period, it looks back at your transfers of assets for less than fair market value over the past five years. The purpose of this is to prevent individuals from giving away their assets in order to qualify for Medicaid. Medicaid may impose a penalty period during which you will not be eligible for Medicaid benefits if you have made such transfers.
How Does the 5-Year Look Back Period Apply to Revocable Trusts?
With a revocable trust, you can retain control over your assets during your lifetime while also ensuring their distribution after your death. Revocable trusts can, however, be difficult to use as estate planning tools because of the 5-year look-back period.
If you transfer assets to a revocable trust within five years of applying for Medicaid, those assets may be subject to the five-year look-back period. If you need Medicaid benefits during the 5-year look-back period, the transfer of these assets may be considered a transfer for less than fair market value, and a penalty may be applied.
Transfers made for less than fair market value are excluded from the 5-year look-back period. A revocable trust can transfer assets for fair market value without being subject to the 5-year look-back rule.
What Are the Options for Dealing with the 5-Year Look Back Period?
There are several options for dealing with the 5-year look-back period if you are considering using a revocable trust:
- If you anticipate needing Medicaid benefits in the future, you should plan in advance to avoid the 5-year look-back period. If you apply for Medicaid more than 5 years before transferring your assets to a revocable trust, you may need to transfer your assets to a revocable trust.
- Use an irrevocable trust: Once an irrevocable trust has been established, it cannot be altered or revoked. The 5-year look-back period does not apply to transfers to irrevocable trusts.
- There are other estate planning strategies that you can use to protect your assets and qualify for Medicaid benefits. It may be possible to gift assets to family members, create a Medicaid annuity, or buy a Medicaid-compliant annuity.
Conclusion
Revocable trusts can be powerful estate planning tools, but it’s important to understand the potential impact of the 5-year look-back period. Consider using it if you are considering it
