Medicaid Trusts is a trust useful in Medicaid planning?

When it comes time to apply for Medicaid benefits to pay for nursing home costs, Medicaid will count all of your assets, provided you have enough control over the assets and can use them to private-pay for your nursing home.  Medicaid has very strict asset limits.  For example, in Massachusetts, an individual cannot have more than $2,000 in assets.

This is where a trust helps.  If you plan ahead, and put your assets into an irrevocable trust at least five years before you apply for Medicaid nursing home benefits, Medicaid will not count those trust assets because they are considered out of your control, and therefore unavailable to you to private-pay for the nursing home.

Will any trust do for Medicaid purposes?

No.  The trust must be carefully drafted.  To qualify, a trust must be irrevocable, which means that you can never regain ownership of the assets once you put them in the trust.  If there is any way you might regain ownership, Medicaid will not recognize the trust.  Although you lose ownership, the trust is a way to preserve the assets for your children, that would otherwise be gobbled up to private-pay your nursing home expenses.

Do you lose all control over the assets in the trust?

No.  You turn the assets over to a trustee (i.e., someone you trust), and you name persons (i.e., beneficiaries) who will eventually get the assets when you die.  Although you can never regain ownership of the assets themselves, you are permitted to get the income generated by the assets.  So if you put an investment account in the trust, the trustee can periodically pay you the dividends on the account as they are earned.  If you put your home in the trust, you are permitted to insert a clause guaranteeing that you will be able to live in the house during your lifetime.

You are also allowed other limited control over the trust assets. You may retain what is called a testamentary limited power of appointment.  In your trust, you name the beneficiaries (usually, your children) who will get the trust assets when you die.  With the power of appointment, however, you have the right to change the beneficiaries at any time by a clause in your will.  You also can retain the right to replace your trustee.  Both of these powers give you some indirect leverage with the trustee and the beneficiaries if they act in ways that you find objectionable or against your interests.

Are the assets protected as soon as you create the trust?

No.  Like all other transfers of assets you make before applying for Medicaid nursing home benefits, trusts are subject to the so-called five-year look-back period.  That is why advanced trust planning — while you are relatively young and healthy — is so important.  Once you create the trust and wait five years, the trust assets will not be counted as your assets when you apply for Medicaid.

Why a trust rather than giving the property away to your children?

Putting your assets in a trust has many advantages over giving your property away outright to your children.  First, what if your children rack up their own debts or get divorced?  The assets you gave them are now their assets, and their creditors and ex-spouses can get at those assets.  A trust contains a spendthrift provision which prevents this.

Second, if you give away assets that have appreciated in value (like your home), your children may end up getting hit with a huge tax bill.  If you originally paid $50,000 for your home, for example, and give it to your children, they take the same $50,000 tax basis as yours.  If they eventually sell the home for $500,000, they will pay tax on the $450,000 gain!  If you put the home in a trust, however, your children’s tax basis in the home would be its fair market value on the date of your death.  Assuming your children sold the house for $500,000 when you died, they would have no gain on the sale — that’s right, $0!  They would pay no tax.

Can you serve as trustee?

Although technically it is possible for you to serve as the trustee (and naming your children as alternate trustees), it is risky and not recommended.  Why?  Although you can never return ownership of the trust assets to yourself, Medicaid might argue that you still retained too much control over the assets.  If you have a child or children that you can trust, it is better to let them serve as trustees.

What property can you put in a trust?

You can put any kind of property into the trust.  At a minimum, you should put the family home in the trust, and reserve the right to live in it during your lifetime.  But you can put investment accounts in a trust as well, and reserve the right to receive the investment income during your lifetime.

How will Medicaid treat the trust income I receive?

When you apply for Medicaid nursing home benefits, you must assign all of your income to the nursing home to pay the costs of your care.  If you are entitled to receive income from the trust, Medicaid will expect that this trust income will go to the nursing home to defray the costs of your care.  Medicaid will pick up the difference.

How much does it cost to have an attorney draft a Medicaid trust?

Because of the complexity of these trusts, elder law attorneys generally will charge between $2,000 – $5,000 to draft a Medicaid trust.  Although this is not inexpensive, you must consider what such a trust will save you in the long term.  For example, if you have a home worth $360,000, and nursing homes cost $10,000 a month, your house will be gone after three years in a nursing home!

if you would like to consult us about whether to set up a trust to protect your hard-earned assets from Medicaid depletion, call us today at 508-316-3853.