The Magic of Testamentary Trusts in Medicaid Planning

 In Asset Protection, Long-Term Care Planning

Photo by Annie Spratt on Unsplash

Testamentary trusts can provide a way to have your cake and eat it too. Most planning to be eligible for Medicaid to pay for your long-term care involves a trade off, putting assets out of your reach by transferring them to children or into an irrevocable trust so that they won’t be counted for purposes of qualifying for coverage. In addition, there’s a five-year wait after any such transfer, a penalty period during which Medicaid coverage is unavailable. (In some states, the transfer penalty only applies to nursing home care and not to Medicaid coverage of home health care.)

There’s one big exception, at least for your spouse, if not for you. The Medicaid rules provide a special “safe harbor” for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. A “testamentary” trust is a trust created in a will rather than through a stand-alone document. Unlike a trust created during life for a spouse, the assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant’s support. If payments are solely at the trustee’s discretion, they are considered unavailable to the Medicaid applicant.

While totally illogical – if one spouse creates a trust during his life for his spouse, the funds will be considered available should she apply for Medicaid benefits, but if created in a properly-written will and funded after the death of the first spouse to die, they won’t be counted – this rule can be very useful for Medicaid planning for the surviving spouse. These trusts can allow a healthy spouse living in the community (a “community spouse”) to leave funds for his surviving institutionalized spouse that can be used to pay for services that are not covered by Medicaid. These may include extra therapy, a geriatric care manager, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that becomes necessary.

Or if both spouses are healthy today, they can split their assets between them, each leaving his or her share in a testamentary trust for the other. This way, they can rest assured that half of what they own will be protected. It won’t have to be spent down if the survivor requires nursing home care, but will be available to the surviving spouse if necessary for living expenses and to supplement any care provided under Medicaid or other benefits programs.

There are two downsides to setting up a testamentary trust plan. First, it means that the estate of the first spouse to die will have to be probated, which would not be necessary if both spouses held everything in joint names or named one another as beneficiaries on all of their accounts. Second, there will be some ongoing administrative costs. Depending on the state, the trustee may have to make annual reports to the probate court and in every state, the trustee will have to file annual tax returns for the trust.

Related Articles:

What Happens to Home Sale Proceeds If One Spouse Goes to Nursing Home?

Will Medicaid Place Lien on Nursing Home Resident’s House if Spouse Lives There?

Should My Parents Give Me Their Home?

Are Irrevocable Trust Funds Countable for Purposes of Eligibility for Medicaid Community Benefits?

Showing 4 comments
  • Gene Torrenti

    Does it make a difference of the trust language includes distributions by an ascertainable standard (“health, education, maintenance and support”), as opposed to a totally discretionary standard?

      • Harry Margolis

        No, either should be fine. But be careful. While we estate planners know that the ascertainable standard is a restriction on trust distributions, Medicaid eligibility workers and even some judges have read the language to direct distributions for health, education, maintenance and support. Make sure you do not use the word “shall,” but instead say that trust distributions “may” be used for these purposes at the discretion of the trustee. Again, estate planners know that “shall” refers to the future, but laypeople and even judges have read it to be directive in the sense of “must.”

      • Jeff Massey

        What is the law/code section that has the language regarding the “safe harbor” rule discussed in this article? I am not an attorney, I am a CFP(r) Professional and love to learn details like this to better discuss things with my clients.


          • Harry Margolis

            It’s a bit complicated because testamentary trusts are treated as an exception to the Medicaid rules deeming certain trust funds to be countable assets for determining Medicaid eligibility. The federal statute 42 U.S.C. Sec. 1396p(d)(2)(A) refers to trusts created by the applicant for benefits or by his or her spouse (plus anyone acting for them, such as a guardian) “other than by will,” thus exempting testamentary trusts from its applications.

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