How trusts fit in with Medicaid planning

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Q. Are revocable family trusts included as assets that must be depleted before Medicaid eligibility?
— Planning

A. Great question, and let’s go through some background first.

Medicaid is a needs-based program with income and asset limitations that apply before you can qualify for assistance.

In order to prevent individuals from merely making transfers of their property, either outright or in trust, to qualify for Medicaid, there is a penalty period imposed on transfers made within five years of applying for Medicaid, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

“The penalty is a period of time during which the applicant does not receive Medicaid benefits after otherwise qualifying, due to the amount transferred within the prior five year period,” she said. “The penalty period is determined by dividing the amount transferred by the monthly penalty divisor which is presently $12,895.”

If an individual establishes a trust using some of his or her own funds, where the individual is the sole beneficiary or one beneficiary in a pool of beneficiaries, the trust may be considered an available resource for purposes of determining eligibility for Medicaid, Romania said.

This is particularly true if the trust can be revoked — a revocable trust — and the assets can be pulled back into the name of the Medicaid applicant, she said.

“If the trust is created by a third party, with third party funds, for the benefit of the Medicaid applicant, then the answer would depend on the specific terms of the trust and whether or not the settlor — the person who created the trust — is the spouse of the Medicaid applicant,” Romania said.

That’s because income and asset limitations are imposed on the community spouse in order for the applicant spouse to qualify for Medicaid.

The state may also have the right of recovery against the estate of a deceased Medicaid recipient for Medicaid benefits paid to such individual during his or her lifetime, Romania said. That means if the deceased Medicaid recipient’s estate has a claim to assets, outright or in a trust, the state may be able to recover such assets.

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