Irrevocable Medicaid Trusts

Medicaid is a partnership between the state and federal governments to provide medical benefit assistance to people, including those over age 65, who have financial need.

In order to be considered to have financial need, when you go into a nursing home and go on Medicaid, you cannot have more than $2,000 (in most states) in “available” resources. Some resources don’t count, such as the car used for your medical transportation. Also, assets that cannot be used for your benefit, such as in an irrevocable trust, don’t count either.

If you give assets away, this may generate a penalty period which I will explain in the next post, but is generally five (5) years. As long as these assets are no longer available for your use, they aren’t considered your resources. So, you could give your assets to your adult children. However, there may be many reasons not to do that. Your child could:

  • Be a minor or otherwise lack capacity,
  • Get divorced and lose the assets in the divorce settlement,
  • Get sued due to a car accident or other event,
  • Lose the assets through poor investments, gambling, etc.

But, there is a better way. You could give the assets to an irrevocable trust. The trust principal would not be for your benefit, otherwise, it would be an available resource. The trustee of this trust would invest those assets. You could retain a right to the income from the trust (in the vast majority of states). The trustee could distribute to someone else, like one of your children, in the trustee’s discretion. After your death, the assets would be divided as you had outlined in the trust.

Let’s look at an example: Mary had $400,000 over the asset limit in her state. She transferred it to an Irrevocable Medicaid Trust. John was her trustee. Mary retained the right to the income of the assets during her lifetime. John, as trustee, could make distributions to Mary’s daughter, Betty, during Mary’s life. At Mary’s death, the assets in the trust would be split between Mary’s daughter, Betty, and Mary’s son, Alex. If Mary needs some of the principal, John could make a distribution to Betty. Betty could use the money distributed to her for Mary’s benefit if Betty wanted to do so but would be under no obligation to do so.

If you wanted to provide the most protection, the trustee shouldn’t be Mary or Betty. If Mary were the trustee, some states would consider the trust assets to be “available” to her. Therefore, unless you’ve checked with your state’s Medicaid-administering agency and they have determined it’s ok for the Trustor to be the trustee of the Medicaid trust, it’s best not to do so. In Illinois, a beneficiary can be the trustee.  If Betty were the trustee and could distribute to herself, it would allow Betty to take all the assets out of the trust for her own benefit and thus, would allow her creditors to do the same thing.

A Medicaid trust can be a great tool to allow you to protect some assets and still qualify for Medicaid. But, each state is different, so call me to discuss.

Bob