Medicaid and Trusts: Preserving Your Assets

With careful Medicaid planning, you may be able to preserve some of your estate for your children or other heirs while meeting the Medicaid asset limit (in most states, a nursing home resident covered by Medicaid may have no more than $14,800 in "countable" assets, although if the nursing home resident is married and living in the State of New York, we can protect more assets with a Spousal Refusal).

The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may spend them, or lose them in a divorce or otherwise. A safer approach may be to put them in an Irrevocable Trust. A trust is a legal entity under which one person -- the "trustee" -- holds legal title to property for the benefit of others -- the "beneficiaries." The trustee must follow the rules provided in the trust instrument. Whether trust assets are counted against Medicaid's resource limits depends on the terms of the trust, who created it, and when it was created. With an Irrevocable Trust, you can even retain the right to change the trust beneficiaries upon your death, should you want to do so.

A "revocable" trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of revocable trusts (that is, the funds that make up the trust) to be your assets, and thus they are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning. They typically just work best for property management and avoiding probate.

Income-only trusts

An "irrevocable" trust is one that cannot be revoked after it has been created, but certain things can be changed, such as the power to change the beneficiary who will receive the trust funds upon your death, as mentioned above. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the "grantor") for life, and the principal cannot be applied to benefit you or your spouse. At your death, the principal is paid to the beneficiaries you specify. This way, the funds in the trust are protected and you can use the income for your living expenses. This can be tax advantageous as well. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home. If you need Medicaid for home care purposes, this trust income can be protected in a pooled income trust.

You should also be aware of possible drawbacks to an Irrevocable Trust arrangement. It can be rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always consider leaving an ample cushion of ready funds outside of the trust in your own name.

You may also choose to place property in a trust from which even payments of income to you or your spouse cannot be made. Instead, the trust may be set up for the benefit of your children, or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.

One advantage of these trusts is that if the trust contains assets that have increased in value, such as real estate or stock, you (the grantor) can retain a "special testamentary power of appointment" so that the beneficiaries receive the property with a step-up in basis at your death. This may also prevent the need to file a gift tax return upon the funding of the trust.

Remember, funding an Irrevocable Trust can cause you to be ineligible for institutional Medicaid for years following the trust funding.

Testamentary trusts

Testamentary trusts are trusts created under a Last Will and Testament. The Medicaid rules provide a special "safe harbor" for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant's support. If payments are solely at the trustee's discretion, they are considered unavailable.

Therefore, these testamentary trusts can provide an important mechanism for community spouses to leave funds for their surviving institutionalized husband or wife that can be used to pay for services that are not covered by Medicaid. These may include extra therapy, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that becomes necessary. But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.

Supplemental needs trusts

The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for his or her benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds will not be considered to belong to the beneficiary in determining his or her own Medicaid eligibility. The only drawback to supplemental needs trusts (also called "special needs trusts") is that after the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.

For more on trusts or Medicaid planning in general, see the Estate Planning section on my website. As a valued client or friend, feel free to call or email me with any questions.





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Questions? Contact us at Brian A. Raphan, P.C.

Brian A. Raphan, P.C.
7 Penn Plaza, 8th Floor | 7th Avenue between 30th and 31st Street | New York , NY 10001
Phone: (212) 268-8200 (800) 278-2960