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In our April 9, 2020 newsletter, we informed readers of changes to the rules for establishing eligibility for home and community-based services, including the imposition of a penalty period for individuals who transfer assets in anticipation of an application for certain Medicaid-funded home care programs. 

As we explained, there are now two timelines to be concerned about for Medicaid funded services: the more well-known 60 month or 5 year “look back” period for an institutional Medicaid application (i.e.. nursing home), and the new 30 month “look back” period for a Medicaid home care application.  

Here, we share some reasons why a Medicaid Trust (also commonly called an Asset Protection Trust) is still an important planning tool in the estate and long-term care planning toolbox despite these recent changes, and we show why proactive and timely planning can help ensure that hard earned assets and homes stay in the family.

As a preliminary matter, keep in mind that to be eligible for Medicaid, an individual’s countable resources must be below a certain threshold ($15,900 in 2021), so a client without long term care insurance has two options: spend down assets by privately paying for care OR take steps to reduce the countable resources held in the client’s name. We often recommend the use of Medicaid Trusts (also referred to as Asset Protection Trusts or Irrevocable Income-Only Trusts) as part of this planning.

What is a Medicaid Trust?

A Medicaid Trust is an arrangement between the Grantor (the person who creates the Trust) and a Trustee (the person or entity which manages Trust property). It is common to appoint a family member as Trustee of this type of trust. Common features of a Medicaid Trust are as follows:

The Trust is irrevocable, which means that the Grantor cannot revoke or amend the Trust or remove property from the Trust without agreement and consent from the Trustee and beneficiaries. That being said, the Grantor retains two significant rights with regard to the Trust: the right to change the Trustee of the Trust for any reason, and the right to change the ultimate beneficiaries of the Trust at any time.

·     The Trust arrangement continues for the lifetime of the Grantor (unless revoked upon consent by the Trustee and beneficiaries at an earlier time).

·     Transfers to a Medicaid Trust must be outside the “look back” period for Trust assets to be fully protected. In other words, property has to be transferred to the Trust 30 months prior to applying for Medicaid home care or 60 months prior to applying for institutional Medicaid in order to avoid a transfer penalty.

·     Medicaid Trusts can be established for more than one “lifetime” beneficiary. This type of “joint” Trust is common when planning for a married couple.

Why is it used?

A Medicaid Trust is used to protect assets for Medicaid eligibility purposes and to avoid the placement of a lien on real property at the end of a Medicaid recipient’s lifetime. New York law currently provides for Medicaid recovery against the probate estate, which is comprised of assets held in the decedent’s individual name on the date of death. Assets held in a Medicaid Trust will pass to beneficiaries directly and without the need for probate, thereby avoiding estate recovery.

What assets should fund a Medicaid Trust?

We frequently recommend that clients fund a Medicaid Trust with real property, investments, and – in some cases – life insurance policies that have a cash value (because the cash value of a life insurance policy is countable towards the Medicaid resource threshold). Assets are transferred to the Trust by re-titling (e.g. by executing a new deed for real property or change of ownership forms for financial accounts).

It is imperative to appropriately fund – and not overfund – the Trust, as Trust assets are not freely accessible to the Grantor.  The limitation on the right to remove Trust property without condition is what protects the assets from having to be spent on the cost of care.

If a home is an exempt resource and therefore not countable, why should it be put in Trust? 

While a home is an “exempt” resource (i.e. does not affect Medicaid eligibility) this exemption only applies while the individual (or a spouse) is living in the home. If the individual can no longer reside in the home because of a change in medical need or financial circumstance, the home loses its exempt status. 

As such, there are two primary benefits of funding a Medicaid Trust with the home:

First, if the home needs to be sold, the proceeds will remain protected within the Trust; and

Second, under current New York law the property will pass to the Trust beneficiaries at the end of Grantor’s lifetime and will not be subject to estate recovery and repayment for services provided by the Medicaid program.

What happens to the home if transferred to a Medicaid Trust?

The Grantor retains the right to reside in any real property owned by the Trust and to receive any net income generated on Trust assets (e.g. rental income). As for taxes, maintenance and carrying costs, the Grantor remains responsible for payment of those expenses.

What about real property located outside of New York State?

A Medicaid Trust can be funded with out of state real property and provides the additional benefit of avoiding the need for “ancillary” probate, a separate court proceeding in that state that would otherwise be necessary to transfer the interest in real property after death.

Are there other benefits to funding the Trust with real property?

There are a few. First, it does not impact the ability to sell the home or buy a new home – the only difference is that the Trustee is part of the transaction. Second, the Grantor retains any real estate exemptions on the residence. Finally, if the property is sold the Grantor also benefits from the capital gains tax exclusion.

Does the Grantor retain any control over the Trust?

While the Trust is irrevocable and the Grantor loses direct control over the Trust assets, these Trusts typically include provisions which provide the Grantor with significant rights and powers: the Grantor can change the beneficiaries of the Trust, the Grantor can change the Trustee, the Grantor retains the right to receive all Trust income (such as interest and dividends on investments), and reside in Trust owned real property without the need to pay rent.

What options are there if access is needed to Trust assets?

There are two options. First, all individuals with an “interest” in the Trust (the Grantor and the beneficiaries, usually the parents and children) can consent in writing to a partial or full revocation of the Trust. Second, these Trusts may include a provision which allows for the Trustee to make distributions to children, grandchildren and further descendants so that funds can be used to help other family members if the circumstances warrant.

While transferring assets to a Medicaid Trust does require the Grantor to relinquish direct control of and access to Trust property, the retained right to reside in Trust property, receive Trust income, change Trustees, and change beneficiaries make them very flexible planning tools. For many clients, this is well worth the benefit of having the Medicaid program cover the cost of care for a skilled nursing facility, which can exceed $14,000 per month here in the Capital Region.