Trust Formation: Medicaid Planning
Forming a trust, or more broadly planning an estate, can be tricky business. The core intention is to take care of your loved ones, and the last thing anyone wants in this process is a mistake or misunderstanding that leads to problems for your family.
Trusts and estates unsurprisingly get even trickier when Medicaid is a factor. Those who plan to use Medicaid must remain under the Medicaid asset limit of no more than $2,000 in countable assets or Medicaid will be compensated for its services through the value of your estate. Because of this, many people transfer their assets to their loved ones, essentially giving them away and losing total control of these assets in the process. They can even be lost by the trusted loved one in a worst case scenario.
Fortunately, there is a safer approach that can protect your assets and still insure that those same assets do eventually pass to your trustee and beneficiaries while still remaining within the $2,000 Medicaid limit. This is the formation of an irrevocable trust.
Irrevocable Trusts: Income- Only Trust
There’s a big difference between a revocable trust and an irrevocable trust when it comes to Medicaid purposes. Medicaid considers a revocable trust, one that may be changed or withdrawn by the persons who created it, to be assets that are countable in determining Medicaid eligibility. This means that a revocable trust will be of no use when trying to plan around the use of Medicaid.
An irrevocable trust is unsurprisingly the opposite of a revocable trust, with the main difference being that it cannot be changed or removed once it has been created. The most common version of an irrevocable trust is drafted in a way that allows for the income from the trust to be made payable to the grantor (you or the person establishing the trust) for life. The downside is that you cannot apply any accrued principal toward the benefit to you or your spouse.
This principal is instead paid to any heirs upon your passing. This is the way by which the funds in the trust are protected while still allowing you to use the trust’s income for living expenses. And toward the purposes of Medicaid this same principal is not counted as a resource so long as the trustee cannot pay it to you or your spouse for your benefit. The only major exception to this is if you move to a nursing home, which results in the trust income going toward living expenses at the nursing home.
There are some obvious drawbacks to this arrangement. The most noticeable is that this arrangement is inflexible. You cannot gain access to any of the trust funds even if you were to need them for some other purpose. The best strategy to circumvent this issue is to leave a significant buffer of available funds kept outside of the trust.
Properties may also be placed into a trust. However it is important to note that payments of income from such a property included in a trust still cannot be made to you or your spouse. Instead, the trust and benefits of the property included may be set up for the benefit of your children or other beneficiaries, who in turn can return the favor by using the property for your benefit if they choose to do so; there is no legal requirement that they do.
Please note! Funding an irrevocable trust within five years of applying for Medicaid might result in a period of ineligibility. The actual period of ineligibility depends on how much is transferred to your trust. For this reason, it’s a good idea to start planning early and strategizing the transfer of your assets to avoid such a period of ineligibility.
Testamentary Trusts
Testamentary trusts are different from Income- Only Trusts in that they are created through the execution of a will. Medicaid considers testamentary trusts differently than a normal, revocable trust in that assets of these trusts are considered available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for any support the applicant might need. If these payments from the trust to the trustee are made solely at the trustee’s discretion they are considered unavailable by Medicaid standards.
These testamentary trusts are particularly useful for spouses who live in communities where their surviving husband or wife needs to pay for services not covered by Medicaid, such as extra therapy, special equipment, medical evaluations, legal fees, etc. It is important to note that the trustee must not have the ability to use these assets for themselves or their spouse or the assets are considered Medicaid eligible.
Supplemental Needs Trusts (Special Needs Trusts)
A third, niche form of irrevocable trust is a supplemental needs trust. Medicaid again details out some specific rules and exceptions for this type of trust. You can transfer assets into a supplemental needs trust even after moving into assisted living without incurring Medicaid ineligibility if the benefactor is a child, relative, or friend under age 65 who is disabled.
When created properly, these same funds in a supplemental needs trust are not considered to belong to the beneficiary in determining that same person’s own Medicaid eligibility. The one major drawback to this arrangement is that your state must be reimbursed for any Medicaid funds spent on behalf of the disabled person upon their passing.
Final Remarks
Families planning estates, especially those who intend to make use of Medicaid, can ill afford mistakes. Every family has their own personal situation. Even within a family circumstances and plans could be unique to the individual spouse. It is important to assure that the proper preparation and steps are taken to insure that your family estate is protected for the future enjoyment of your children. We look forward to helping you find the plan that’s right for you and your family.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Cansino Blanchette Law Firm or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.