How Income Trusts Help If Your Income Is Too High for Medicaid

Using an income trust is a legal way to qualify for Medicaid nursing home coverage when you have too much income.

By , Attorney · Washburn University School of Law

Income trusts are a type of special purpose trust that can be helpful to people trying to qualify for Medicaid. They can be especially useful for applicants in states that have a set income limit for qualifying for Medicaid. Sometimes referred to as Qualifying Income Trusts, Qualified Income Trusts (QITs), Income Only Trusts, or Miller Trusts (based upon a court case with the same name), they're 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.

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 actually 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 $2,700 but the monthly income cap is $2,523, 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 $2,700 will be used to pay the applicant's "share of cost" for long-term care. (Income trusts are only used for individuals who are paying for long-term care services.)

Note that Medicaid counts gross income for eligibility purposes, which includes the Medicare Part B premium deducted from most individual's Social Security checks.

Income Cap States vs. Medically Needy States

While all states use income to determine eligibility, the way they look at income differs. Income trusts are only useful in some states (those that have a straight income cap).

Income Cap States

Some states 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. These states are sometimes referred to as "income-cap" states or "income test" states. Some income cap states are Arizona, Colorado, Delaware, Indiana, Ohio, and South Carolina.

The income caps can vary, but an income limit of $2,742 is the maximum (300% of the monthly SSI amount in 2023).

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.)

Medicaid doesn't count any income coming into the income trust when determining income eligibility. 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.

Medically Needy States

Income trusts aren't used in the majority of states because most states don't have a simple income cap to qualify for Medicaid. Sometimes called "medically needy" states, these states require Medicaid applicants to "spend income" their income on medical costs. These states open up Medicaid to individuals with a lot of income but high medical expenses. States with medically needy programs include California, Florida, Georgia, Illinois, Maryland, Massachusetts, New York, Pennsylvania, and about 26 more.

Income trusts aren't used in these states because applicants can just qualify for Medicaid when their health care expenses reduce their income below the state's medically needy income standard.

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 can't be used by the trustee for any other purpose than the Medicaid applicant's allowable expenses. For example, the trust can't pay health insurance premiums for other family members.

Required Payback Provisions

Upon the death of a Medicaid applicant/beneficiary, the state has priority to recover expenses that Medicaid paid on behalf of the beneficiary. So only after the state is reimbursed out of the income trust can any money remaining in the trust 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 isn't 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 income to be direct-deposited into the trust bank account.)

In many cases, all of the income of a Medicaid applicant who is going into long-term care 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 $1,374 and a monthly pension of $1,500 would be over the income limit in all states (total income is $2,874). 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 can be added to this type of trust. It can be composed only of income going to the individual.
  • Excluded income (income that Medicaid doesn't count) 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 funds.
  • Income and interest earned by the trust, if any, can accumulate and won't be counted as a resource.

We don't recommend you try to set up an income trust yourself; contact a disability lawyer or estate planning lawyer to make sure your income trust won't violate Medicaid rules.

Special Needs Trusts for Assets

If you have too many "resources" (assets) to qualify for Medicaid (rather than income), you can put your assets into a "first-party special needs trust" or a "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.

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, using an income trust is a legal way to qualify for Medicaid when you have too much income.

Updated February 1, 2023

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