Are Revocable or Irrevocable Living Trusts Useful in Qualifying for Medicaid?

People who own assets that exceed the allowable Medicaid limits have few options when trying to qualifying for Medicaid. For instance, older people might want Medicaid coverage when they realize they can't afford the high costs of nursing homes or long-term care.

A person whose assets' total value is above the Medicaid limit might try to get around Medicaid rules by giving away assets or using a trust. But most trusts won't help a person qualify for Medicaid. And giving away assets to others—or giving them to most trusts—will result in Medicaid transfer penalties that will prevent the person from qualifying for Medicaid for several years.

Trusts That Won't Help You Qualify for Medicaid

Most trusts—whether they are revocable or irrevocable—won't help you become Medicaid eligible. Unless you use a special purpose trust or income trust (both discussed below), the assets in the trust will count against you when determining whether you are eligible for Medicaid benefits.

Revocable Trusts

Many people are under the mistaken belief that transferring their assets to a revocable trust will help them qualify for Medicaid. But assets held in a revocable trust always are treated as being owned by the settlor (the person who creates the trust) for purposes of Medicaid eligibility.

The reason these transfers don't help with eligibility is because the settlor still controls the assets in a revocable trust by retaining the right to revoke the trust. And a settlor of a revocable trust who is also the trustee—which is the usual arrangement for revocable trusts—controls the disposition of trust assets. This control of the assets means a settlor serving as trustee still "owns" the trust assets for Medicaid eligibility purposes.

Medicaid Qualifying Trusts

Before 1993, people trying to get Medicaid often created what were referred to as "Medicaid Qualifying Trusts." Despite their name, these trusts actually disqualify a person from Medicaid.

Medicaid Qualifying Trusts were irrevocable trusts created by a person seeking Medicaid eligibility that were funded with that person's assets. In some cases, the settlor was both the trustee and the beneficiary of the trust. Distributions to the beneficiary were to be made in the discretion of the trustee. In other words, the beneficiary—who also was trustee—had complete control over trust assets.

Because the trustee and the beneficiary were the same person, the trust assets were treated as if there was no trust at all. Even though these trusts were irrevocable, trustees had discretion to use trust assets for their benefit or their spouses' benefit. This attempt to "control" assets after transferring them to the irrevocable trust resulted in Medicaid disqualifying the beneficiary.

Many people, however, still think that putting assets into an irrevocable trust will qualify you for Medicaid. This is only true in some narrow circumstances (discussed below).

Irrevocable Trusts Created After 1993

The basic rule for irrevocable trusts created today is that any asset in an irrevocable trust that the trustee can choose to give to the beneficiary will be treated as a countable resource by Medicaid. To the extent the trust doesn't allow for any distribution to the beneficiary, it will be treated as a transfer of resources subject to Medicaid's transfer penalty.

In other words, while irrevocable trusts can protect assets from being counted by Medicaid (depending on whether the trustee has discretion to spend the assets), Medicaid will still count the transfer of the assets to the trust as a disqualifying transfer if the transfer was made during the transfer penalty period.

For instance, suppose a settlor establishes an irrevocable trust that names the settlor and the settlor's spouse as beneficiaries and also gives the trustee discretion to distribute assets to them. Medicaid will count some or all of the trust assets as available to the settlor and the spouse because the assets are subject to the trustee's discretionary power.

In other words, Medicaid will assume that the trustee will exercise maximum discretion by distributing the assets to the settlor or the spouse. Where the trustee lacks discretion to distribute assets, those assets will not be counted as resources for Medicaid purposes.

Unfortunately, however, the assets not counted as resources will be subject to a transfer penalty that will disqualify the beneficiary from Medicaid for a period of time. This penalty period starts when the person applies for Medicaid, not when the transfer was made. Read about how long the Medicaid transfer penalty lasts.

Trust That Can Be Used to Qualify for Medicaid

There are limited options for using a trust to qualify for Medicaid. And it's important that you follow Medicaid rules for creating these trusts. Otherwise, your assets will be counted against you, and you won't qualify for Medicaid.

Special Purpose Trusts

Medicaid rules do allow some irrevocable trusts to own assets transferred by a person even if that person also is a beneficiary. In other words, assets in these irrevocable trusts won't subject the person to a transfer penalty, and the assets won't be counted as available resources. These irrevocable trusts are referred to as "special purpose trusts."

Federal law has created these special trusts that are allowed to hold assets transferred by an individual Medicaid beneficiary. To keep those assets from being considered when determining eligibility for Medicaid, they must be distributed according to specific rules established by statute. The two types of special purpose trusts are:

• first-party special needs trusts established for a person under the age of 65, and
• pooled trusts administered by a non-profit organization for the benefit of a person of any age.

Read more about these trusts in our article on Medicaid special needs trusts for assets.

Income Trusts

Another type of special needs trust is called an income trust—sometimes called a "Miller trust" or "qualified income trust." Income trusts are designed to administer the income of a Medicaid beneficiary who may have more income than allowed by the state Medicaid agency.

Getting Help

Qualifying for Medicaid can be a complicated process. If your total assets make you ineligible for Medicaid, you should consider speaking with an estate planning or elder law attorney who specializes in Medicaid planning.