Medicaid Trusts

Paul B. Bartlett, P.C.
Trusts & Wills
ALTCS - Medicaid
Guardian & Conservator
Lawyers - Tucson, Arizona

Medicaid Trusts

There are six (6) trusts that are useful in Medicaid planning:

  1. Miller Trust

  2. Revocable Living Trust

  3. Grantor Irrevocable Trust

  4. Under 65 Payback Trust

  5. Under 65 Pooled Trust

  6. Testamentary Supplemental Needs Trust

Miller Trust

If a person applying for ALTCS/Medicaid has too much income to qualify, that person may be able to qualify with an "Income Only" trust, also known as a "Miller Trust". For a thorough discussion of the Miller Trust, click Miller Trust.

Revocable living trust

We use a revocable living trust in Medicaid planning for married couples. A revocable living trust will not be helpful to a single person who needs ALTCS. In a married situation, we are trying to increase the amount that the community spouse (the spouse who is not going into nursing home care) is permitted to retain while the nursing home spouse qualifies for ALTCS. The amount that the community spouse gets to keep is half of what the spouses own on the day that the nursing home spouse is deemed medically eligible for ALTCS, up to a maximum of approximately $154,140 in 2024. If the couple's countable assets amount to less than $308,280 (in 2024), the community spouse will receive something less than the maximum community spouse allowance.

Here is the thinkinig behind using a revocable living trust to increase the amount that the community spouse gets to keep...Home property is considered as exempt by ALTCS if it is owned personally by husband, or wife, or both. That sounds like a good thing, but it is really unhelpful if you are trying to increase the amount that the community spouse gets to keep. After all, half of something big is bigger than half of something small.

If husband and wife transfer their home property into a revocable living trust, the property loses its exempt status. That sounds like a bad thing, but it is really a good thing. This is because the value of the home property will be counted in calculating the size of the community spouse resource allowance. After all, half of something big is bigger than half of something small.

In order for the ill spouse to qualify for ALTCS, it will be necessary for the couple to spend down some assets to get to the level that equals the community spouse resource allowance, plus the $2,000 that the ill spouse is permitted to own. In many cases where a revocable living trust is used, this spend down can be accomplished without actually spending any money. Instead, the spend down is accomplished, after the ill spouse is considered medically eligible under ALTCS rules, by transferring the home property out of the trust and into the ownership of the community spouse.

Grantor Irrevocable Trust

The best example of a person who needs an irrevocable trust is a patient who needs a personal attendant while living in an assisted living facility or in a nursing home.  ALTCS/Medicaid will not pay for companion care.  The strategy here would be to make a gift so that the assets are not counted in determining the patient's eligibility for ALTCS/Medicaid.

The patient can make this kind of a gift without a trust.  One of the drawbacks to plain, ordinary gifting is that the amounts gifted become vulnerable. Here are some of the risks to which they are vulnerable:

  • Child's creditors attach the gift, in which case the gift benefits neither the child, nor the elder.

  • Child's spouse makes claims against the gift in a divorce, in which case the gift benefits neither the child, nor the elder.

  • Child becomes disabled and the gift becomes mired in the child's conservatorship, in which case the gift benefits neither the child, nor the elder.

  • Child dies, and none of the gifted funds can be used to help the elder because they transferred to child's heirs on death.

A grantor irrevocable trust addresses these risks. The elder creates this trust.   The elder funds this trust with any kind of asset, including his house, cash or securities.  If the elder is presently using the cash and securities for income, that income can continue to flow to the elder. The elder can even be trustee of this trust.

The trust has a spendthrift clause which specifies that the trust principal is unavailable to the child's creditors. The trust may hold the assets for the child for a period of time even after the elder dies.

When the elder makes a gift to this irrevocable trust, the elder may incur an ALTCS eligibility penalty, depending upon how much is transferred to the trust. Very often, the elder is not in immediate need of ALTCS benefits, and depending upon the size of the gift, the penalty may expire before the elder actually needs the ALTCS benefits. No penalty will result when a gift to a trust is made more than 5 years before applying for ALTCS.

The trust specifies that the elder is not entitled to receive principal distributions from the trust. So the elder is effectively severing his or her ties with all assets that are gifted to this trust. However, the elder may continue to receive the income from those gifts, even though principal may not be touched.

A transfer of a house or other appreciated capital assets to the irrevocable grantor trust can be very advantageous. If the elder transfers his house outright to the child, the child will lose the step-up in tax basis that ordinarily occurs upon the death of the elder. Provided that the grantor irrevocable trust can return its income to the elder, the tax basis of all appreciated capital assets owned by the trust will be adjusted upwards upon the elder's death. This means that all of the capital gains tax that had built up in the house or other asset during the lifetime of the elder is effectively wiped out upon the elder's death, provided that the trust owns the property.

The irrevocable grantor trust allows the elder to maintain his or her estate plan for passing assets at death.

The trust can provide that principal distributions can be made, in the discretion of the trustee, to persons other than the elder. This person, who must be trusted, can make payments to the elder for necessary expenses, like companion care.

Under 65 Payback Trust

Sometimes a person under age 65 needs care in a nursing home. Or sometimes a person under age 65 need to be made eligible for the ALTCS program in order to be entitled to its medical care insurance benefits. Assuming that the person has too many resources, the person can gift his assets to an Under 65 Payback Trust. The rules for this kind of trust were created by Congress. Only people under age 65 can create this trust. The asset within this trust can be used by the trustee for the benefit of the patient, within limits provided by state statutes. When the person dies, the assets in the "Payback Trust" must first be applied to reimburse the State of Arizona for its lifetime expenditures for the benefit of the patient. The balance of the trust can then go to the patient's named beneficiaries or heirs.

When the patient transfer assets to an Under 65 Payback Trust, the patient does not incur an eligibility penalty. This means that the patient can make himself resource eligible for ALTCS, immediately.

This kind of trust can be created by the patient himself, or by a parent, conservator or by the court.

Under 65 Pooled Trust

For a patient under age 65 and who comes into money unexpectedly, the Under 65 Pooled Trust is often the solution to the problem of excess resources. Instead of creating a special needs trust from scratch, the patient signs on to an already existing trust. The trust has to be administered by a non-profit organization. The assets of all members of the pool are combined in a single fund. The non-profit keeps track of all the assets. The non-profit has obtained prior approval of its plan documents from ALTCS and from Social Security, so the patient does not have to seek such approval. The trustee is already experienced at managing funds and approving or denying requested expenditures according to law. Administrative costs and legal fees are kept to a minimum.

Testamentary Supplemental Needs Trust

We use this type of trust when there is a married couple and one of the spouses is on ALTCS. If the community spouse dies, we do not want the assets to go to the nursing home spouse. That would give the nursing home spouse excess resources and disqualify the nursing home spouse from ALTCS. So, we write a will for the community spouse that disinherits the nursing home spouse. The problem is that you cannot completely disinherit a spouse in the State of Arizona. The law provides that even when a spouse is disinherited, that spouse is entitled to receive a package of allowances and exemption equal to $37,000. If the nursing home spouse does not exercise his right to receive this package of allowances and exemptions, ALTCS may take the position that he has given away $37,000, which would result in an eligibility penalty of approximately 10 months. During that time, the patient would lose ALTCS benefits.

The Testamentary Supplemental Needs Trust addresses this problem. The community spouse writes a will giving all property to the kids except a $37,000 special needs trust in favor of the nursing home spouse. Because the $37,000 is in a special needs trust, the funds do not count against the nursing home spouse for ALTCS eligibility purposes. The funds in the special needs trust can be used to purchase for the patient items which ALTCS would not purchase, such as dental work, furniture, TV, companion care, etc. When the nursing home spouse dies, the will can provide that the money left in the trust will be distributed to the kids.

The spouse of any nursing home patient should consider doing this type of will, unless the couple previously entered into a pre-nuptial agreement or a post-nuptial agreement mutually agreeing to waive the package of statutory allowances and exemptions.

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