How Income Trusts Help If Your Income Is Too High for Medicaid
Income trusts are a legal to qualify for Medicaid nursing home coverage when you have too much income.
Income trusts are a type of special purpose trust that can be helpful to Medicaid applicants in states that have a set income limit for qualifying for Medicaid, such as Texas and Arizona. Sometimes referred to as Qualifying Income Trusts, Qualified Income Trusts, or Miller Trusts (based upon a court case with the same name), they are used when a Medicaid applicant has too much income to qualify for Medicaid but not enough to pay for nursing home care or other long-term care costs.
Income Cap States vs. Medically Needy States
In the states that have a cap on the amount of monthly income a Medicaid applicant can receive and still qualify for Medicaid coverage of long-term care costs, sometimes referred to as “income-cap” states or "income test" states, the cap can vary, but an income limit of $2,205 is the maximum (300% of the monthly SSI amount in 2017).
In these states, when a Medicaid applicant receives income that exceeds the monthly amount allowed by Medicaid, the applicant can become eligible by redirecting some or all of that income to an income trust. (Redirecting income simply means having a source of income directly deposited into a checking account titled in the name of the trust.) Any income coming into the income trust is not counted when determining income eligibility for Medicaid. Because these trusts reduce the amount of income received directly by the applicant to an amount less than the income cap, they help the applicant qualify for Medicaid.
However, income trusts are not used in the majority of states (sometimes called "medically needy" states). In these states, one of the requirements for becoming eligible for Medicaid is that an applicant’s income be "spent down" on medical costs. Income trusts are not used in these states because applicants qualify for Medicaid when their health care expenses reduce their income below the state's medically needy income standard.
How Income Trusts Work
With an income trust, much of the money that comes through the trust goes right back out to pay Medicaid for part of the cost of care. So a qualified income trust doesn’t shelter income for the Medicare applicant, but without such an income trust, the applicant wouldn’t qualify for Medicaid.
For instance, if a Medicaid applicant gets a Social Security check for $2,300 but the income cap is $2,205, the applicant wouldn’t qualify for Medicaid. But if the Social Security check is direct-deposited into an income trust, the applicant will qualify for Medicaid, although most of the $2,300 will be used to pay the applicant’s share of cost for long-term care.
Note that Medicaid counts gross income for eligibility purposes, which includes the Medicare Part B premium deducted from most individual’s Social Security checks.
What an Income Trust Can Pay For
All of the applicant’s income, including any income deposited into the trust account, is counted in determining the applicant's share of cost, which is the portion of medical expenses that remain the applicant’s responsibility.
But before paying the Medicaid applicant's share of cost, the trust can pay the Medicaid applicant a small personal needs allowance and, if married, it can pay the Medicaid applicant's spouse (called the community spouse) a monthly allowance. The amount that can be paid to the community spouse is called the minimum monthly maintenance needs allowance" (MMMNA). (For more information, see Nolo’s article on protection of a spouse’s income from Medicaid.)
An income trust can also pay for Medicare premiums and medical costs not covered by Medicare and Medicaid.
An income trust cannot be used by the trustee for any other purpose than the Medicaid applicant's allowable expenses. For example, the trust cannot pay health insurance premiums for other family members.
Upon the death of the Medicaid applicant/beneficiary, the state has priority to recover expenses that Medicaid paid on behalf of the beneficiary. Anything remaining in the trust after the state is reimbursed may be paid to other beneficiaries named in the trust document. Ordinarily, all income deposited into the trust will be spent each month as part of the beneficiary's "share of cost," so there is not likely to be anything left.
Who Can Establish an Income Trust
Any individual, of any age, who is otherwise eligible for Medicaid may establish an income trust. The individual does not have to be disabled. But an income trust can be used only when the Medicaid applicant is residing in a living arrangement where long-term care services can be provided.
How an Income Trust Is Established
In general, a Medicaid applicant establishes an income trust by designating someone to serve as trustee and establishing a bank account in the name of the trust. The applicant's income is then direct-deposited into this newly created account. (Most states require the direct deposit of income into the trust bank account.) In many cases, all of the income of the Medicaid applicant is set up to go into the trust account, leaving nothing payable directly to the applicant.
Medicaid applicants have a choice whether to redirect all or merely some of their income to the income trust, but all of the income from any one source must be redirected. For example, an individual with monthly Social Security income of $874 and a monthly pension of $1,500 would be over the income limit (total income is $2,374). By redirecting either the Social Security income or the monthly pension, or both, to an income trust, the individual would be under the income cap. The applicant can't direct half of the pension into the trust.
Note the following additional rules regarding directing money into the trust:
- The account must be opened with a $0 balance or, in some states, a minimal amount required by the financial institution to open the account.
- No resources may be added to this type of trust. If can be composed only of income going to the individual.
- Excluded (not counted) income should not be assigned to the trust. Examples of excluded income include income tax refunds, certain annuity payments, Agent Orange payments, VA Aid and Attendance and housebound allowances, VA reduced pension, and vocational rehabilitation.
- Income and interest earned by the trust, if any, can accumulate and will not be counted as a resource.
Special Needs Trusts for Assets
If you have too many resources or assets to qualify for Medicaid (rather than income), you can put your assets into a first-party special needs trust or pooled trust and still qualify for Medicaid. These special needs trusts also have Medicaid payback provisions. For more information, see our article on using special needs trusts when you have too many assets for Medicaid.