Without Medicaid planning, generally you can only keep $2,000 of countable assets (as a single person). If you need Medicaid assistance in a nursing home. Medicaid planning allows you to preserve some of your assets as allowed by law, but don’t expect to hear about this from the Medicaid office. Through careful planning, you can preserve assets to supplement your own needs while on Medicaid, and also to pass along an inheritance to your children.
People often ask about gifting assets to a child. The problem is, that you have no control over assets you give away. Some children can be trusted with money, some can’t. But even the most trustworthy child might divorce, or lose his or her job and wind up in debt, or even become disabled or die unexpectedly. What happens then? You don’t want your child’s problems to bump into your money. Gifting assets outright may be the only choice in a crisis situation; but if you’re planning ahead you may want to consider a trust arrangement.
There are various types of trusts that accomplish different purposes. For many people, they have a “revocable trust,” sometimes called a “living trust.” That is a trust for traditional estate planning purposes, to reduce or even avoid probate. It also keeps the assets and ultimate beneficiaries more confidential and off the public record. By its nature, a revocable trust is flexible, and it can be amended or even revoked by the person who created it. A traditional revocable (or living) trust does not protect assets from Medicaid. Medicaid considers the assets in a revocable trust to be part of the applicant’s countable assets. Although many people presume otherwise, they are in for rude surprise when they find out that their revocable trust protects nothing for Medicaid planning.
Some irrevocable trusts are noncountable for purposes of Medicaid. An “irrevocable” trust means the person who created it can no longer change it after it’s been created. When used for Medicaid planning, an irrevocable trust can pay income to you (as the person establishing the trust, called the “Grantor” or a “Settlor” or even a “Trustor”) for life. However, for Medicaid planning purposes the trust must also prohibit any distributions of principal to the benefit of the Grantor or to the Grantor’s spouse. Then when the Grantor dies (or at the surviving spouse’s death if it’s a joint trust), the remaining trust property is paid to your heirs.
In this type of income-only trust, the assets in the trust are protected, and you still receive income for your living expenses. Medicaid won’t count the trust’s principal as a resource if, as stated above, the trust cannot pay principal to you or your spouse ever or under any circumstances. Since you remain entitled to income, that income might eventually go to the nursing home even if you’re on Medicaid, but the principal can be protected.
There are drawbacks to this type of trust. Since it’s irrevocable, it can’t be changed and you give up all access to the trust funds even if you need them later. Accordingly, you need to keep some of your funds outside of trust, for your use if you need extra funds.
The trust is allowed to make distributions of assets to children or other beneficiaries. Those beneficiaries may, at their discretion, decide to use property they receive for your benefit, but that is completely up to them. There is absolutely no legal requirement for them to use that money for you; that’s why this type of trust is not for everyone, or every family.
Besides Medicaid planning, these trusts can have important tax advantages. For example, the trust can be structured so that the Grantor could change the ultimate beneficiaries. That allows a Grantor to re-allocate the trust if a particular child or beneficiary disappoints them or otherwise acts inappropriately. That power to change the ultimate beneficiaries is called a “special testamentary power of appointment” retained by the Grantor. Another advantage of that power of appointment is that the assets in the trust that have accumulated in value over time, can receive a step-up in basis for tax purposes at your death. The power also can avoid having to file a gift tax return when the trust is funded.
One final tax benefit, and perhaps the most important, is that the trust (if properly written) will allow the Grantor still to sell a house placed in the trust and not pay any capital gains. In other words, if the trust is written properly and the house is deeded over to the income-only trust and then sold later, that sale is taxed as if the Grantor (rather than trust) owned the home personally. On the other hand, if a parent gifts their house to a child and then the house sold at any time, the child will need to pay capital gains taxes on any appreciation in value of the home they received by gift. A home received by gift does not get a stepped up basis unless the gift is done through the right type of trust, or…in some cases…if the parent still retained life-time rights in the home place.
Another Medicaid rule that applies to irrevocable trusts is that funding an irrevocable trust will make you ineligible for Medicaid for five years afterwards. There are limited exceptions to this, such for a trust established for the sole benefit of a disabled child.
Using testamentary trusts to protect a surviving spouse
If you’re caring for your spouse, you need to make sure that you don’t have a sweetheart Will. What’s a sweetheart will? It’s the Will most married couples have, leaving to their surviving spouse, outright. It basically says, “I love you honey, and if you survive me you get everything. If you don’t survive me, everything goes to our children.” That’s an “I love you” will.
Unfortunately, if the surviving spouse needs Medicaid, all of the surviving spouse’s assets will be subject to a Medicaid spend down. But there is a better way, instead of using an “I love you dearly but…” Will. This is described below.
To protect assets for a surviving spouse, you need to use the Medicaid rules allow a testamentary trust (i.e., a trust that is created under a Will), for the surviving spouse to be noncountable for Medicaid purposes. I call this an “I love you dearly honey, but” trust, because you’re saying that I love you, but I want to make sure you don’t run out of money so I’m putting these assets into a trust for you, rather than giving them to you outright. The assets of these “I love you dearly but” 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, the trust assets are considered unavailable. Moreover, there is no five-year look back period for these trusts.
Example: Mom has Alzheimer’s that has progressed and Dad has been caring for Mom at home. Now Dad gets a devastating diagnosis of terminal cancer and now it’s just few months at most before Dad won’t be around to help Mom. When Dad is gone or becomes too weak to assist Mom, then Mom will need to leave the home and go to the nursing home. Mom likely will need to spend down a large part of the assets in her name.
The right type of testamentary trust in Dad’s Will could place assets into a trust under his Will (i.e., a testamentary trust) that could be used to supplement Mom’s care at home or in a nursing home. A properly written testamentary trust can allow the healthy spouse to leave funds for their surviving institutionalized husband or wife, which can be used to pay for services not covered by Medicaid. For example, the testamentary trust could pay for extra therapy, meals out, trips away from the nursing home, special equipment, evaluation by medical specialists or others not covered by legal fees, legal fees, maintaining the residence, tithes to church, visits by family members, or even for a period of private pay if needed for a transfer to another nursing home if that becomes necessary. Some nursing homes (but not all) will even allow the trust to pay for the difference between a private and semi-private room. But be careful and make sure that you have an elder law expert prepare this type of will. The goal will be that the assets that continue to be held in the testamentary trust will not be a countable asset for the surviving spouse, and there is no five-year look-back period triggered by funding the trust.
Supplemental needs trusts
Another type of trust used in Medicaid planning is a trust created for the sole benefit of a disabled person under age 65. The Medicaid rules allow you, even after moving to a nursing home, to set up this trust if you have a child, other relative, or even a friend who is under age 65 and disabled. The rules would allow you to transfer assets into a properly written trust for his or her benefit without incurring any period of ineligibility. If properly written, the funds in this “sole benefit trust” will not be counted as assets belonging to the beneficiary when determining the beneficiary’s own Medicaid eligibility. Again seek specialized help in preparing this type of a trust.
For more on supplemental needs trusts, search this site for “supplemental need trusts.”
For more on trusts in general, see the estate planning section.