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Trusts and Medicaid – Competing Forces

Trusts and Medicaid are very similar to oil and water – they do not mix. Before I explain the problem, let’s understand the terms that we are using and then the issue.

A “trust” is a legal arrangement through which one person (or an institution, such as a bank or a law firm) called a “trustee” holds legal title to property for another person called a “beneficiary.” The rules governing how the trust operates are generally set forth inside the trust document.

In many instances, a revocable trust (also called a living trust – it is the same type of arrangement) is set up so that a person transfers his own property to the trust, acts as his own trustee, and is his own beneficiary during his lifetime. As an example, my wife and I set up a revocable trust. We transferred the majority of our property to that trust. We are the trustees of that trust. During our lifetime, we are the beneficiaries of that trust. If we become incapacitated, new trustees will take over and manage that trust for our lifetime. Upon our deaths, our trustees will distribute our property according to the instructions contained in the trust document.

There are multiple good purposes in using a trust. It provides a great tool for management of property in the event of disability or death. It also avoids probate. It allows for the transfer of property upon death much easier and quicker than going through any kind of court process. The cost of “administering” a trust generally can be much less than the cost of probate. The trust document is a private document (as opposed to a probate where everything is public). The trust can be used for effective tax planning.

Now let’s talk about long term care and Medicaid. Generally, when someone goes into long term care, that person is going to have to privately pay for care until that person’s assets are used up, with the exception of certain exemptions (a home, $2,000 in cash, a vehicle, personal property, a certain amount of life insurance, and certain funeral plans). However, some property may be non-countable for various reasons. An example is that a business can be considered “non-countable” by Medicaid. Thus, if it is non-countable, it does not have to be spent down to pay for care. This can become very important when we have a couple, and one spouse needs long term care. In that instance, we want to make as much of the property “non-countable” as we can, so as to provide an income to the well spouse and not impoverish them. Even in a situation where the person needing long term care is single, we really want to avoid having to sell the farm to pay for care because of tax consequences, as well as other reasons.

This is where Medicaid and trusts clash. Under federal legislation that was passed in the early 1990’s, it was determined that putting property into a trust does not protect it from Medicaid. Basically, the law says that property that is placed into a trust is generally available to pay for that person’s care.

Kansas Medicaid has taken it a step further. Kansas says that property that would otherwise be exempt (such as the home) or non-countable (such as farm ground or a business) loses its status as exempt or non-countable property, because it is in a trust. Even though a revocable trust is generally not designed to protect the property from creditors (which means if you have a trust and you die owing someone money, creditors can still have a claim against the trust), the Kansas Medicaid authority has determined that property placed in a revocable trust is available and must be spent down. The effect of this is that if a husband goes into a nursing home and the wife is left at home, and if their home is in a revocable trust, then Medicaid will never pay for the husband’s care, even though the family may have divided the property according to the Medicaid division of property rules and spent down the husband’s share. In Kansas, Medicaid will say that the home is an available resource and is not exempt because it is in the revocable trust.

Most of the time, the only solution is to deed the property out of the trust and back into the names of the husband and wife.

However, the trust may become irrevocable or non-amendable because of some event, creating a real problem. What event would that be? Let me give you an example.

Most revocable trusts provide that they are revocable or amendable by the husband and wife that set it up. But what if one of them has died? What if one of them has lost capacity? Can the trust be amended even after the death or incapacity of the husband or the wife? Many times the answer is “no.”

Another problem that arises is that sometimes the husband and wife have separate trusts. The husband then dies and the wife eventually goes in the nursing home. The husband’s trust has the farm in it. The wife in the nursing home needs care. Without the trust, the wife would qualify for Medicaid with the land treated as income-producing property and thus not available. Upon the wife’s death, then the family would settle up with Medicaid through the estate recovery process for the amount that Medicaid paid on behalf of the wife.

But, because the property is in the husband’s trust, that will not work. As a result, the deceased husband’s trust must now start liquidating trust assets to pay for the wife’s care. There may be significant tax problems as a result of selling the trust property.

Will any trust protect assets from Medicaid? Yes. There are certain types of irrevocable trusts that can provide asset protection. However, such trusts have to be very specifically designed to achieve all of the family’s goals and must be designed so the assets are “not available” for Medicaid purposes.

If you or someone you know is facing the possibility of long term care, you need to have your estate plan examined by a qualified elder law attorney. An improperly drafted estate plan can have devastating consequences for a family.

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