How Does Medicaid Estate Recovery Work when a Testamentary Trust is Involved?
What if an unknown Medicaid estate recovery claim pops up, and the surviving spouse is not an explicit heir, but rather beneficiary of a testamentary trust? How does delayed recovery function in Massachusetts after that spouse someday passes?
Your question raises two interesting questions. First, how does delayed Medicaid estate recovery work? Second, how is this affected by the use of a testamentary trust? The short answer is that I don’t know and while you ask about Massachusetts, where I practice, the answers could differ from state to state. But at least we can discuss the concepts.
Medicaid (MassHealth in Massachusetts) has the right to recover from the estate of a beneficiary whatever they have paid for their long-term care during life and for any health care coverage after age 55. Under the estate recovery rules, such a claim must be deferred during the life of a surviving spouse. To be honest, I’ve never been sure how this works since the surviving spouse should be free to spend whatever they have whether or not inherited from the deceased spouse. The fact is, I haven’t actually run into this situation over 35 years of practice. The reason for that I believe is that in Massachusetts the Medicaid program is only able to seek recovery from the deceased beneficiary’s probate estate. In virtually all cases, the Medicaid beneficiary either transfers whatever they own to their healthy spouse or they own everything in joint names so assets pass to the surviving spouse without going through probate and thus avoid probate.
But you raise another question. By definition, testamentary trusts are funded through probate because such trusts are created in the wills of decedents. So, for instance if spouse A owns a home in their own name, receives MassHealth benefits, and then at their death leaves the house in a testamentary trust for their surviving spouse, what happens when the surviving spouse dies. My guess is that this would be more likely to be vulnerable to MassHealth deferred estate recovery claim because it would be easier to track than property in the surviving spouse’s own name. On the other hand, whatever is in the trust will not be subject to any estate recovery claim for MassHealth benefits the surviving spouse might receive since it won’t pass through their estate. One of the main reasons to create a testamentary trust is to leave property for a surviving spouse that can be used for their benefit without either having to be spent down to achieve MassHealth eligibility or be subject to estate recovery for the surviving spouse’s MassHealth expenses. In most cases, these are created by the healthy spouses of nursing home residents.