The Whys and Hows of Medicaid Trusts

A Medicaid asset protection trust (Irrevocable Trust) allows 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, household 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 five years before the donor applies for Medicaid long-term care benefits:

  • Medicaid does not penalize the donor for transferring assets.
  • The trust’s existence does not impact Medicaid eligibility.

Assets placed in an Irrevocable Trust are not considered countable for Medicaid after the five year look back period. Once the trust owns assets, Medicaid cannot count the asset and the asset cannot be seized to reimburse long-term costs.

When an Irrevocable Trust protects a primary residence, the homeowner continues to live in the home. If investment assets are transferred to the trust, the former owner may not sell the investments but may continue to receive income generated from the investments; an Irrevocable Trust can be designed as an income-only trust. Note that a Medicaid asset protection trust is irrevocable, so once any assets are placed in the trust, the grantor loses control of the assets.

Qualified plans and individual retirement accounts can’t be transferred to a trust, so it may be necessary to liquidate some accounts to fund an Irrevocable Trust or leave them out of the Trust entirely.

An Irrevocable Trust is not your only option, however. Sometimes it makes sense to transfer the home to the well spouse, who may own and remain there. A limited amount of assets may be retained by the spouse.

The house could 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’s move into a nursing home and who already owns an equity interest in the home.
  • A caretaker child — a child of the Medicaid applicant who has lived in the house for two years before the applicant moved into the nursing care facility and who had provided care that allowed the person to stay home.

If the house is sold by the person on Medicaid benefits while that person is in a nursing home, that person will become ineligible for Medicaid, and 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 try in order to become eligible for Medicaid. That is, an elderly homeowner deeds a house to a grown child but retains the right to live there for the rest of her life. However, if a home is placed in a life estate and then sold while the owner is still living, it is possible that the value of the life estate may need to be reimbursed to Medicaid. The children may also have to pay capital gains taxes on their share of the sales proceeds.

This is just a summary of a very complicated process. There are many provisions and limits. To make sure you are protected, work with legal and financial professionals.

You can count on Ericson, Scalise & Mangan, PC to provide you with sound guidance and experience in these uncertain times. For assistance with your legal needs, please contact us today at (860) 229-0369, or email us at info@esmlaw.com.