Are Tax Planning Trusts Protected for Medicaid Purposes?
If a spouse passes away and has ABC trust structure (marital trust, bypass trust, QTIP trust) and each of these trusts are funded for the benefit of the surviving spouse, are any of these trusts sheltered from a nursing home (aka Medicaid)?
No. Under the Medicaid trust rules, a trust created by a deceased spouse is treated just as if the surviving spouse had created it herself. Assets in such a trust — one created by the applicant for Medicaid or by her spouse — are considered available to the applicant for Medicaid to the extent the trustee has discretion to distribute them to her or for her benefit.
In your example, the bypass trust could be protected if it were only for the benefit of the couple’s children and grandchildren and not available to the surviving spouse. Similarly, the funds in the QTIP share could also be protected if the income were distributable to the surviving spouse, but not the principal.
Illogically, there’s an important exception to these rules. If the trust is created through the husband’s will — a so-called “testamentary” trust — rather than as a separate trust document, then it is protected for Medicaid purposes. Most estate plans are not structured this way because one of their goals is to avoid probate, but some clients do go this route reasoning that the Medicaid protection is worth the extra cost and administrative burden of probate.