How to Use a Trust in Medicaid Planning

Income-Only Trusts in Planning for Medicaid

An irrevocable trust is a separate entity that can hold and protect assets. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the grantor) for life, and the principal can’t be applied to benefit you or your spouse. At your death, the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses.

For Medicaid purposes, the principal in these trusts is not counted as a resource, provided the trustee can’t pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home.

Medicaid has carefully defined eligibility guidelines, including limits on the amount of income and assets an applicant may have, and those limits vary by state. Many individuals find that their savings and resources exceed those thresholds. In these situations, proactive planning can make a meaningful difference.

A Medicaid Asset Protection Trust (MAPT), when thoughtfully designed by experienced elder law counsel, can help align assets with Medicaid’s requirements while preserving them for long-term security. By transferring certain assets—such as a home, other real property, cash, stocks, and other countable assets—into a properly structured MAPT, those resources are no longer counted toward Medicaid’s asset limit.

Importantly, qualified retirement accounts, including IRAs, 401(k)s and 403(b)s, are generally not counted as available resources for Medicaid eligibility and remain outside the trust. With careful planning, families can create a strategy that supports both eligibility goals and financial stability.

You may also choose to place property in a trust from which even payments of income to you or your spouse can’t be made. Instead, the trust may be set up for the benefit of your children or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.

One advantage of these trusts is that if they contain property that has increased in value, such as real estate or stock, you (the grantor) can retain a “special testamentary power of appointment” so that the beneficiaries receive the property with a step-up in basis at your death. This will also prevent the need to file a gift tax return upon the funding of the trust.

Remember, funding an irrevocable trust within the five years prior to applying for Medicaid (lookback period) may result in a period of ineligibility. The actual period of ineligibility depends on the amount transferred to the trust. Learn more about Medicaid’s asset transfer rules in our Medicaid Planning Guide.

Testamentary Trusts

Testamentary trusts are created under a will. Medicaid rules provide a special “safe harbor” for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. Generally, income and assets from testamentary trusts are not countable for Medicaid purposes for the surviving spouse.

Therefore, these testamentary trusts can provide an important mechanism for spouses to leave funds for their surviving spouse that can be used to pay for services that are not covered by Medicaid.

These services may include:

• Additional care not being paid for by Medicaid
• Extra therapy
• Special equipment
• Evaluation by medical specialists or others
• Legal fees
• Visits by family members

But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.

Supplemental Needs Trusts

The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for their benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds in them will not be considered to belong to the beneficiary in determining their own Medicaid eligibility.

There is one notable drawback to sole benefit supplemental needs trusts. After the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.

To find out whether a trust is the right Medicaid planning strategy for you, schedule a free consultation with an elder law attorney at Pierro, Connor & Strauss today!