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

Individuals who have assets in excess of the allowable Medicaid limits have limited options today when it comes to qualifying for Medicaid. This most often comes up when older folks are trying to qualify for nursing home or other long-term coverage, since even those with a fair amount of assets can't afford the high cost of nursing homes.

The obvious option of giving away assets to others will result in Medicaid transfer penalties that will prevent the individual from qualifying for Medicaid for a period of time. This is true with giving away assets to most trusts as well.

Revocable Trusts

Many people are under the mistaken belief that a transfer of an asset to a revocable trust will help the individual qualify for Medicaid. Assets held in a revocable trust are always treated as still being owned by the individual for purposes of Medicaid eligibility. The reason these transfers do not help with eligibility is because the individual still controls the asset in a revocable trust, either by retaining the right to revoke the trust or by retaining the power to control the disposition of the assets (for example, being able to spend the money), such as by acting as trustee of the revocable trust.

Medicaid Qualifying Trusts

Before 1993, individuals trying to get Medicaid often created what were referred to as "Medicaid Qualifying Trusts." These were irrevocable trusts created by the individual and funded with the individual's assets. In some cases the individual was both the trustee and the beneficiary of the trust, and distributions to the beneficiary were to be made in the discretion of the trustee.

In cases where the trustee and the beneficiary were the same, the trust assets were treated as if there was no trust at all. Even though these trusts were irrevocable, the trustee had discretion to use the trust assets for the benefit of the beneficiary or the spouse of the beneficiary. This attempt to "control" assets after transferring them to the irrevocable trust resulted in Medicaid's disqualifying the beneficiary.

The name "Medicaid Qualifying Trust" is actually a misnomer, because such trusts actually serve to disqualify the individual from Medicaid. Many people, however, still think that putting assets into an irrevocable trust can 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 does not allow for any distribution to the beneficiary, it will be treated as a transfer of resources subject to Medicaid's transfer penalty.

So 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. Here's how it works.

Whenever there is an irrevocable trust with a discretionary clause established by the individual or the individual's spouse, and where the individual or the individual's spouse is a beneficiary, Medicaid will count some or all of the assets in the trust as available to the individual.

The assets that Medicaid will deem available to the beneficiary and/or the spouse are those that are subject to the trustee's discretionary power (Medicaid will assume the trustee will exercise maximum discretion to distribute the assets to the beneficiary 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. And since 2005, this penalty period starts when the individual applies for Medicaid, not when the transfer was made. Read about how long the Medicaid transfer penalty lasts.

Note that some irrevocable trusts contain assets of the individual and a spouse along with resources that belong to other individuals. In these situations, Medicaid will determine the individual's proportionate share. Any distribution that is not made to others that is not for the benefit of the individual will be considered to be a transfer of resources, and Medicaid will impose a penalty period.

Special Purpose Trusts

Medicaid rules does allow some irrevocable trusts to own assets transferred by an individual even if the individual is also a beneficiary. In other words, assets in these irrevocable trusts will not subject the individual to a transfer penalty and the assets will not 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 the individual Medicaid beneficiary. For the value of those assets will not be considered when determining eligibility for Medicaid, they must be distributed according to specific rules established by statute. These two types of special purpose trusts are:

• First-party special needs trusts, established for an individual under the age of 65, and
• Pooled trusts, administered by a non-profit organization for the benefit of the individual of any age.