Living Trust

Catastrophic Illness Trust

Learn here about this trust that is meant to protect you and your assets if you were faced with a catastrophic illness.

A catastrophic illness trust is set up to protect you and your assets in the event that you face a catastrophic illness. A catastrophic illness is defined as any illness that is extremely expensive in relation to the size of one's estate. An irrevocable catastrophic illness trust is a legal document that is established for the specific purpose of administering assets on behalf of someone who is, or expects to become, catastrophically ill.

After complying with the necessary waiting period, assets placed in a catastrophic illness trust can no longer be confiscated by the government as repayment for medical costs paid by Medicaid. Because the trust is irrevocable, once assets are transferred to this trust it cannot be changed, altered or amended by anyone. Properly structured, an irrevocable catastrophic illness trust is an integral part of an effective strategy to protect assets when a catastrophic illness strikes.

Characteristics of a catastrophic illness trust:

Medicaid is the only government program that will pay for long-term convalescent care. Medicare, the Veterans Administration, and Social Security do not cover long-term care costs. Medicaid is a program of last resort. An individual must be "broke" before Medicaid will pay for medical costs associated with a long-term catastrophic illness.

The government has written very specific guidelines that an individual must follow if they wish the federal government help pay for catastrophic long-term costs.

Under the Health Insurance Portability and Accountability Act signed into law on August 22, 1996, beginning January 1, 1997, it is a FELONY if you violate any of the eligibility rules as you transfer assets to qualify for Medicaid.

The government has set specific time limits, known as the "look-back period" that must be adhered to in order to qualify for Medicaid payments for long-term care:

• If assets are given directly to children or other heirs you are required to wait 36 months and 1 day before you can apply for Medicaid.

• If assets are given directly to or from a trust you are required to wait 60 months and 1 day before you can apply for Medicaid.

Transferring assets to an Irrevocable Catastrophic Illness Trust can be an effective means of qualifying for Medicaid to cover long-term care. The Act specifically identifies certain assets as inaccessible (i.e., assets you give away) to qualify for Medicaid. Inaccessible assets include:

• Outright gifts

• Assets in Irrevocable Catastrophic Illness Trust

Only countable assets need to be transferred to your irrevocable catastrophic illness trust. Generally the Act permits the well spouse to keep the home and approximately $78,000 of joint assets. The specific amount varies from state to state. The fly in the ointment is that when the second spouse dies, Medicaid often places a lien on the home for any amount expended by the state to service the ill spouse. You must consider all the tax implications—capital gains tax, gift tax and estate tax—on each asset transferred into the catastrophic illness trust.

In your catastrophic illness trust you name a third-party trustee. Normally this is a family member or a close personal friend. Once assets are transferred to the irrevocable trust this individual becomes responsible for your financial affairs. It is critical that you choose your trustee wisely. Since your catastrophic illness trust is irrevocable (i.e., it cannot be changed) it is important that you name several individuals to act as successor trustees in case the individual you originally name is either unable or unwilling to serve.

Once you transfer your assets to your catastrophic illness trust they are no longer available to you, without the assistance of the trustee, regardless of the circumstances:

• You cannot reverse the transfer even if you are ineligible for Medicaid under the look-back rules.

• You cannot reverse the transfer even if, in the future, the Medicaid program is eliminated by the government.

• You cannot use the assets as collateral to obtain a loan because they now belong to the irrevocable trust.

• You cannot use the assets even if you never need Medicaid and want to use the assets to maintain your lifestyle.

• You cannot use the assets to pay for medical procedures that are not covered by Medicaid.

The Irrevocable Catastrophic Illness Trust is a mirror image of your living trust. It names the same successor trustees, beneficiaries and identical distribution instructions.

In addition to transferring countable assets into an irrevocable trust you can rearrange ownership between spouses to make assets unavailable for Medicaid. Again, the specifics vary from asset to asset and from situation to situation. Never attempt to rearrange ownership of your assets without the assistance of competent counsel.

You should begin planning your catastrophic illness trust as soon as you recognize long-term illness is imminent. Do not wait until the catastrophic illness strikes. Often illnesses such as Alzheimer's and Parkinson's Disease take many years to totally debilitate. Planning should start as soon as possible.

Involve the entire family in developing the most effective strategy to protect your assets. Everyone needs to understand the implications of transferring assets into the irrevocable trust. Transfer to the Irrevocable Catastrophic Illness Trust only those assets that cannot be converted from "countable assets" to "exempt assets."

Use of the catastrophic illness trust should be seen as an act of final desperation—either give them away or spend the assets to cover long-term medical bills. View transferring assets to the catastrophic illness trust as a measure of last resort, to be embarked upon only if there is no other alternative.