Understanding How a Medicaid Trust Works

As we age, we may become more concerned about how we will pay for our own or our spouse’s long-term care needs. With rising costs of nursing home and in-home care, your hard-earned money could be wiped out completely in as little as a few months.

Estate planning techniques can utilize irrevocable trusts like Medicaid Asset Protection Trusts. They allow a person to qualify for long-term care benefits from Medicaid while protecting assets from being depleted if long-term care is needed.

To qualify for Medicaid, your assets must be under a certain level. Rules about asset levels are strict, and there is a five-year lookback period to see if an individual qualifies.

When an Irrevocable Trust is created, and assets are transferred into the trust at least five years before the donor applies for Medicaid long-term care benefits:

1) Medicaid does not penalize the donor for transferring assets.

2) The trust’s existence does not impact Medicaid eligibility.

3) Assets cannot be seized to reimburse long-term care costs.

Assets placed in an Irrevocable Income Only Trust (IIOT) are not considered countable for Medicaid. Once the trust owns the assets, Medicaid cannot count it as your asset when determining your eligibility for aid, nor can they seize trust assets to reimburse long-term care costs. Income that is distributable to the beneficiary will still be paid to them even if they are in a long-term care facility.

When a primary residence is placed into an IIOT, the homeowner may continue to live in the home. If investment assets are transferred to the IIOT, the former owner may continue to receive income generated from the investments, hence the name Irrevocable Income Only Trust. Remember, these are irrevocable trusts. Once any asset is placed in the trust, the grantor loses control of those assets and a trustee is now in control of the management of trust assets.

It is important to note that qualified plans and individual retirement accounts cannot be transferred to this type of trust. It may be necessary to liquidate some accounts to fund an IIOT.

An IIOT is not your only option, however. Sometimes it makes sense to transfer your primary residence to a well spouse. That spouse may remain living there. A limited amount of assets may be retained by a person whose spouse is receiving Medicaid assistance.

Primary residences may also be transferred without penalty to:

• A child under age 21 who is blind or disabled.
• A trust for the sole benefit of a disabled individual under age 65.
• A sibling who has lived in the home for two years before the Medicaid applicant moves into a nursing home and who already owns an equity interest in the home.
• A caretaker child of the Medicaid recipient who’s lived in the house for two years before the recipient moved into the nursing care facility and who had provided care that allowed the person to stay home.

A house not held in an IIOT for at least 5 years might be sold by the person on Medicaid benefits while that person is in a nursing home. In this case, that person will become ineligible for Medicaid. The proceeds of the sale of the house may have to be used to pay nursing home bills.

A life estate is another strategy that people employ to become eligible for Medicaid.  A life estate entails a homeowner deeding their residence to a grown child, while retaining the right to live there for the rest of his or her life. If the home is placed in a life estate and then sold while the owner is still living, the value of the life estate may need to be reimbursed to Medicaid. In this case, the child may have to pay capital gains tax on the sale.

About the Author, Attorney Catherine Craig

Cate is a trusted advisor for individuals and families who seek practical strategies for their estate planning and estate-related needs. Her practice focuses on trust and estate planning, Medicaid / Title XIX, probate, and business succession planning. Cate also handles residential and commercial real estate transactions.

Do you have questions?

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