Dad died 5 years ago and there is a trust under his will for Mom. Will the trust be countable if Mom goes into a nursing home?
Mom and Dad set up an irrevocable trust years ago (Bill Clinton was on his first term) and put land and some other assets in the trust. Are the assets in the trust safe?
Dad has a revocable trust (although the front page says it is a “living trust”) he set-up several years ago. How will Medicaid treat that trust?
Get Your Head Around the Rules
To understand how Medicaid treats trusts, recall that Medicaid has three types of rules that apply to trusts (and many other assets). If you really want to read about those rules, you can on this website. Also, this discussion does not address special needs trusts, which are generally a whole other matter. But in a nutshell here they are:
- Medicaid has rules regarding what assets will be counted for purposes of determining whether someone will qualify for Medicaid. Some trusts will count; others won’t.
- If an asset does not count, but the applicant or her spouse once owned that asset (that is, they transferred the asset out of their names), Medicaid has rules that will “punish” the applicant for transferring or releasing title to the asset.
- If the asset is under the limit for qualifying for Medicaid or is not counted by Medicaid for eligibility purposes, the asset may still be available for estate recovery when the applicant dies.
Let’s take each of these general Medicaid rules and apply them to trusts.
How Does Medicaid Count Trusts?
It depends upon two things. Whether the trust is revocable or irrevocable, and whether the trust was set-up by the applicant or his spouse.
If a trust is something like a bag to store assets in, then think of a revocable trust as a nylon mesh beach bag. Medicaid can see everything in it, and if assets are otherwise countable the trust doesn’t make any difference. That is (heh, heh) “plain to see.”
That is why most living trusts don’t do a thing for asset protection (although I do occasionally use them in advanced asset protection planning strategies).
If the trust is irrevocable, things are a bit more complicated. Think of a black canvas bag with locks and buckles on it.
If either the applicant or his spouse set up the trust and there is any way (I mean ANY WAY) that any portion of the trust could be distributed to the applicant, Medicaid will count that trust portion. For example, if an irrevocable trust says that a trustee can distribute any amounts in the trust to Mom or Dad if he is in a good mood and it snows in July Medicaid will count the whole trust.
If Mom or Dad set the trust up and it says to distribute the income to Mom or Dad, but never to distribute principal to Mom or Dad (well . . . maybe the trustee could distribute principal to other people, just not Mom and Dad), Medicaid will count the income . . . but not the principal.
If the trust is irrevocable and someone other than Mom or Dad set-up the trust and put assets in the trust, Medicaid will count the trust only to the extent that the trustee MUST make a distribution to Mom or Dad. I said “MUST” . . . the trustee MAY be able to make a distribution and it won’t cause any Medicaid problems.
To recap: If Mom and Dad set up an irrevocable trust and there is any conceivable way, no matter how far-fetched, that the trustee can make a distribution: Potential Medicaid Unhappiness. If someone else set up the trust and put their assets in, and if the trustee has no legal requirement to make a distribution to Mom or Dad: Medicaid Happiness.
Trash the Rules If a Trust Under a Will is Involved
I lied. A little. The rules above do NOT apply if either Mom or Dad set up a trust under his or her will and his or her assets flowed into that trust. The trustee COULD make a distribution to either Mom or Dad (whichever one of them is left alive) and Medicaid will not count the trust. Medicaid will count the trust only to the extent that the trustee MUST make a distribution.
In other words, a trust under either Mom’s or Dad’s last will and testament is treated the same as a trust set up by some other person.
You want to know why? So do I. If you figure it out send me an email.
How Does Medicaid Treat Transfers Into a Trust?
Easy question. If the assets in the trust are countable, there is no Medicaid transfer penalty. If the assets in the trust are NOT countable under the rules above, there is a Medicaid transfer penalty.
Remember, the transfer penalty is “punishment” for transferring the assets out of your name, to a place where they cannot be counted, and then applying for Medicaid within five years of the transfer.
Once Again, What About Wills?
There is no transfer penalty if a transfer accomplished by will (including a transfer into a trust under a will).
What About Estate and Recovery and Trusts?
Another easy question. If an asset does not count because it was not available to the applicant at his option, then it certainly will not be available for estate recovery when the applicant dies.
This part actually does make sense. Assets in a revocable trust will be wholly available for estate recovery the same as if there was no trust. Assets in an irrevocable trust will be available for estate recovery only to the extent the trustee is required to distribute the assets back to the estate of the deceased applicant or to pay his outstanding claims.
For some strange reason I never drafted an irrevocable trust that way (you may now chuckle).