Living Trusts & Medicaid Nursing Home Rules

By Beverly Bird

All living trusts are not created the same -- and this is a crucial issue if you're planning to use one as a way to qualify for Medicaid for your long-term care. Medicaid will pay for a nursing home subject to some rules, one of which concerns your assets. If have the option to sell assets to pay for your care, you don't actually need Medicaid to pay for you. Medicaid is funded by state and federal governments -- and the government won’t part with money if it doesn’t have to do so.

Qualifying for Medicaid

One way to qualify for Medicaid long-term coverage involves giving away your property. If you no longer own it, you can’t liquidate it to pay for care. Nursing homes can be extremely expensive, so many individuals prefer that their children, relatives or friends enjoy the fruits of their labors rather than see it dissipated. Placing your assets in trust is another option.

Revocable versus Irrevocable Trusts

Simply placing your assets in any living trust won’t do. If the trust is revocable, you continue to have control of the property you place into it. You typically act as trustee, managing your assets -- and you can take the property back into your ownership any time you want. The government takes the position that if you can do this, you can get to it to fund long-term care. Only an irrevocable trust helps you qualify for Medicaid. With this type of trust, you can’t act as trustee, but must name someone else to manage the trust and its assets. You can usually take income from the trust, but not portions of the principal -- the assets with which you funded it. The trust will hold onto your property, keeping it outside your ownership -- and you can’t get it back. Your trustee will pass it to your beneficiaries at your death, or at some other time, which you specified in the trust’s formation documents.

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The Five-Year Rule

Creating and transferring your assets into an irrevocable trust won’t immediately make you eligible for Medicaid. The federal Deficit Reduction Act of 2006 imposes a five-year “look back” period if you create and fund a trust, and then need to enter a nursing home. The same rule applies if you gift your property to your children or others. You cannot give away any assets, either to another individual or to a trust, for less than their fair market value during the five years immediately preceding your need for long-term care. If you form an irrevocable trust in 2014, you’re likely not eligible for full Medicaid long-term coverage until 2019. After five years pass, the government considers that this property is no longer available to you for purposes of qualifying for Medicaid.

The Disqualification Period

If you transfer your property into the ownership of an irrevocable trust within five years of entering a nursing home, you’re not forever barred from receiving Medicaid long-term care assistance. The disqualification period depends on an equation that involves dividing the value of the assets you transferred by the average cost of nursing home care in your state. If the average cost is $5,000 a month, and if you transferred $100,000 in property to your trust within the five-year look-back period, you would be disqualified from receiving Medicaid for 20 months -- which is what you get when you divide $100,000 by $5,000.

Reclaiming Assets

One way to dodge the disqualification period – or at least abbreviate it – involves taking back your assets or some portion of them. The bad news is that this only works if you give the property away to friends or relatives. The very nature of an irrevocable trust prevents you from taking the assets back, so if you need a nursing home within five years of establishing such a trust, you’ll likely be disqualified from coverage for a period of time.

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How Does a Living Trust Avoid Nursing Home Costs?


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What Is an Irrevocable Medicaid Trust?

The cost of long-term care, even for a short while, can easily eat up an individual or couple's estate. An irrevocable Medicaid trust is a permanent agreement made by the trustor, or owner, that establishes control and management of her assets while she's still alive. The goal of forming an irrevocable Medicaid trust is to allow the trustor to keep her assets for her heirs while still qualifying for Medicaid insurance coverage for long-term medical care later. Medicaid, a state-administrated medical assistance program for low-income persons, has both income and financial resource limits for recipients.

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