Law News and Tips

Medicaid Income-Only Trusts

Fred Vilbig - Wednesday, March 15, 2017


Fred L. Vilbig © 2017


     When I first started practicing law in the early 80’s, it was relatively easy to use trusts to get people to qualify for Medicaid.Congress caught on, though.  They played around with the rules so that it usually looked as if short of giving all of your money away 5 years before you might go into a nursing home, you wouldn’t qualify for Medicaid.  That meant that you would have to be destitute for 5 years even though you may not end up needing to go into a nursing home.

     We have been working on a case in the St. Louis County Probate Court where to settle the case, we have to set aside some money for the benefit of the claimant.  Since the claim is being disputed, we don’t want to just give the other guy the money, and we certainly don’t want a nursing home to get it.  So that started me thinking.

     I had heard about irrevocable, income-only Medicaid trusts, but no one had really been able to explain the law behind them to my satisfaction.  As a part of this case, I had reason to research the issues on my own.  And I found out that, in fact, they do work.

     When qualifying for Medicaid, you’re not supposed to have income in excess of a certain amount.  It varies from state to state, but in Missouri right now, it’s $834 per month for an individual and $1,129 for a couple.  If you have less income than that, you are treated as “categorically needy.”  These are the people you would ordinarily consider as needy.

     But there’s another category of Medicaid beneficiaries. These are people who receive more than the threshold amount, but not enough to pay the Medicaid rate for nursing care. Their income falls a little short.  These are the “medically needy.”  They have to “spend down” their own income, and Medicaid makes up the balance.

     On the asset side, a Medicaid applicant can have no more than a certain amount of “non-exempt” “available resources” before being disqualified.Certain assets are excluded from this calculation such as the applicant’s residence (but there will be a lien put against it for any Medicaid benefits received), one automobile, household goods, and some other miscellaneous items.  Currently in Missouri, that maximum amount of available resources is $1,000 for an individual and $2,000 for a couple.  People will give away assets to get down to that level, but then you have to live in poverty for 5 years, and like I said above, you might not even need nursing care.I’m not sure that risk is worth taking.

     The dilemma is how do you make your “available resources” unavailable without reducing yourself to poverty.  The answer is that you put all or some portion of your assets into an income-only trust and irrevocably give the principal to your children on your death.  You get to keep the income off of the assets, but you give up any rights to the principal.  So long as you don’t file a Medicaid application within 5 years of when you fund the trust, the trust principal is no longer an available resource.

     If you consider doing this, it is important to note that this restriction is very strict.  Under the law, if there is any way for an applicant to get at the principal at any time, that trust principal will be treated as an available resource.

     The reason this works is because there is a single provision in the Medicaid law that allows you to exclude from “available resources” any assets that are not available to the applicant under any circumstances.  Some applicants with trusts tried to retain the right to get distributions under very limited circumstances, but the courts have ruled that the underlying trust assets would then be treated as “available resources.”

     As you can imagine, Medicaid has fought these.  They have litigated these extensively on the East Coast, but unless they were set up wrong, the government has lost all of these cases.

     It should be noted, though, that to my knowledge, no Missouri courts have yet ruled on this issue.  In our case, we are trying to force Missouri HealthNet (the Missouri Medicaid agency) into the case to force the issue.  However, in other cases like ours, they have avoided getting entangled in the lawsuits on procedural grounds.  We’ll still try.

     So although no assurances can be given, it looks as if a client can set up an irrevocable trust, retain the right to income only, give the principal away (but only on death), and be able to limit his or her exposure to nursing home costs.  In analyzing whether to use this strategy, clients need to carefully look at their available resources to see if they can live only on the income the trust will generate.  In addition, long-term care insurance should still be considered in deciding how to plan for this eventuality, but the irrevocable, income-only Medicaid trust might fit into a client’s plan.

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