4 Key Things to Know about Trusts and Medicaid Planning

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There are many types of trusts that can be helpful in protecting your assets while allowing you to qualify for Medicaid. This article is a brief overview of the things you need to know when setting up a trust.

1. It Must Be Irrevocable

An irrevocable trust cannot be altered or amended, and are thus the only type of trust that offers any benefit for Medicaid planning. That is because of the Medicaid law that says that if you can receive back from the trust any portion of the principal of the trust (i.e., the assets or cash that were used to fund the trust in the beginning), then the entire value of the trust becomes a countable asset for Medicaid eligibility purposes. If the trust isn't irrevocable (meaning you can change it) then Medicaid fears you could alter the trust terms to allow a distribution back to yourself. Thus, in order to be helpful for Medicaid purposes, the trust must be irrevocable and prohibit distributions of principal back to you for any reason. An irrevocable income-only trust is also possible, and such a trust can pay the income back to you for your lifetime to help you pay the bills, etc., without causing it to be counted as an available asset under the Medicaid rules. (Note that a transfer of your money or other assets into an irrevocable trust will be deemed a gift for Medicaid purposes, so it will cause a penalty period unless you apply for Medicaid at least five years after you fund the trust.)

2. Revocable Trusts are Bad for Medicaid Planning

Trusts that can be revoked entirely or amended in part are commonly used for estate planning purposes and have the distinct benefit of permitting your estate to avoid probate upon your death. However, as mentioned above, such trusts have little use in Medicaid planning, since 100 percent of the assets in the trust will be deemed countable for Medicaid purposes. Thus, transferring your assets into a revocable trust will not accomplish your goal of protecting your assets.

3. Know the Difference Between First- and Third-Party Trusts

The "first-party trusts" discussed above are trusts that you establish yourself, and then fund with your own money. "Third-party trusts," on the other hand, are trusts that someone else sets up for you.

For instance, a relative may have set up a trust for you within their will, to assist you in paying bills. If such a trust includes language that prohibits use of the trust funds to pay expenses otherwise payable by government entities (such as Medicaid), then no part of the trust will be countable, should you apply for Medicaid. Such a trust can even permit distributions of principal to you, unlike the first-party irrevocable trust discussed above. Such trusts are known as "Special Needs Trusts" or "Supplemental Needs Trusts" because they can only be used to supplement—and not replace—otherwise available government benefits.

4. Consider Special Trusts for Disabled Adults

There is a type of first-party special needs trust that can contain your own assets, that can benefit you for your entire life, and that will instantly be non-countable for Medicaid purposes. Such a trust is known as a "(d)(4)(A)" trust—after the section of the Social Security law that describes this type of trust. In order for this to work, however, you must be under age 65 and disabled at the time the trust is set up, the trust must be established by a par­ent, grandparent, legal guardian or a court, on your behalf and for your sole benefit. The trust must also contain a "payback" provision. Such a provision must provide that, upon your death, the state be repaid whatever Medicaid benefits it provided to you, out of the trust assets. Of course, the trust may not even exist at that point, having been spent on various items to benefit you during your lifetime.

As you can see, the area of trusts can be very complicated! If any of the above interests you, be sure to find a local attorney with experience both in Medicaid planning and trust drafting to assist you. While setting up a trust can be expensive, it is usually well worth the money for the benefits it will provide you in the long run.

K. Gabriel Heiser is an attorney with over 25 years of experience in elder law and estate planning. He is the author of "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets," an annually updated practical guide for the layperson.

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7 Comments

This is real helpful, I have a disable son who is 30.I am care proder for him with mosaic

Have a handicapped son I who is 30.And I want to set up a trust for him.

the irrevocable trust does not work any more in Michigan. We were denied Medicare just for that reason. The state has decided to "redefine" it's law, so were had to undo it all and start over again. Check with your state laws first before starting this long and costly procedure.
Do you know Id Medicaid looks at tax returns? Also do they look to see if your have an IRA....?