A Medicaid trust is a strategic estate planning tool designed to help individuals qualify for Medicaid benefits while preserving assets for their heirs. However, one of the most common questions people have is whether they can access funds from a Medicaid trust. The answer depends on the type of trust and how it is structured.
Understanding Medicaid Trusts
A Medicaid Asset Protection Trust (MAPT) is an irrevocable trust that helps protect assets from being counted for Medicaid eligibility purposes. Because Medicaid has strict income and asset limits, placing assets in a properly structured trust can prevent the government from requiring those assets to be spent on long-term care before Medicaid coverage begins.
Revocable vs. Irrevocable Trusts
- Revocable Trusts: Assets in a revocable trust are still considered part of your estate and available for your use. However, Medicaid will count these assets when determining eligibility, meaning a revocable trust does not provide Medicaid protection.
- Irrevocable Medicaid Trusts: When assets are placed in an irrevocable Medicaid trust, the grantor (the person creating the trust) gives up direct control over those assets. Because the assets are no longer legally owned by the grantor, Medicaid does not count them as part of their financial resources-but this also means the grantor cannot access the funds directly.
Key Differences Between Revocable and Irrevocable Trusts for Medicaid Planning
| Feature | Revocable Trust | Irrevocable Medicaid Trust |
|---|---|---|
|
Can the grantor access funds? |
Yes, full access |
No, limited or no access |
|
Protected from Medicaid spend-down? |
No |
Yes, if properly structured |
|
Subject to Medicaid's asset limits? |
Yes |
No, after the look-back period |
|
Can be modified or revoked? |
Yes, at any time |
No, once established |
|
Can generate income for the grantor? |
Yes |
Yes, but only income, not principal |
|
Effect on Medicaid eligibility |
Assets counted |
Assets not counted after 5 years |
Can You Access Funds in a Medicaid Trust?
Since a Medicaid Asset Protection Trust is irrevocable, the grantor typically cannot access the principal once it is placed in the trust. However, there are some ways the trust may be structured to provide limited benefits:
1. Income from the Trust
- The trust can be structured to allow the grantor to receive income from the assets (such as interest, dividends, or rental income).
- While this income does not count as part of the Medicaid asset limit, it may count toward Medicaid's income limit and be used for long-term care expenses.
2. Distributions to Beneficiaries
- The trustee can distribute assets to beneficiaries (such as children or other heirs), but not directly to the grantor.
- If the grantor's spouse is a beneficiary, the trust could provide financial support while still maintaining Medicaid eligibility for the grantor.
3. Paying for Certain Expenses
- The trust may be able to pay for specific expenses that benefit the grantor, such as property taxes or maintenance on a home owned by the trust.
- This must be structured carefully to avoid Medicaid disqualification.
What Happens If You Take Money from a Medicaid Trust?
If the grantor attempts to access principal from the trust, Medicaid will likely consider the trust's assets as available resources, which could result in:
- Medicaid disqualification or penalty periods for violating the look-back rule.
- A requirement to spend down assets before Medicaid coverage can begin.
- Legal or tax consequences depending on how the trust was structured.
Can a Trustee Access Funds in a Medicaid Trust?
The trustee of a Medicaid Asset Protection Trust has control over the trust's assets but must follow the terms set in the trust agreement. While the trustee can distribute funds to beneficiaries, they cannot give funds directly to the grantor (the person who created the trust). Doing so would violate Medicaid rules and could cause Medicaid ineligibility for the grantor.
Trustee Responsibilities
- Managing and investing trust assets.
- Ensuring distributions follow Medicaid-compliant guidelines.
- Avoiding any actions that would make trust assets countable for Medicaid eligibility.
Medicaid's Look-Back Period and Trust Access
When transferring assets into a Medicaid trust, it's essential to consider Medicaid's five-year look-back period (or 60 months in most states). If assets are transferred into the trust within five years of applying for Medicaid, the applicant may face a penalty period during which they are ineligible for benefits.
Key Considerations for the Look-Back Period:
- Any assets transferred into a Medicaid trust within five years of applying for Medicaid may be subject to penalties.
- Once the look-back period passes, assets in the trust will not be counted toward Medicaid eligibility.
- The earlier a Medicaid trust is established, the more protection it provides.
Alternatives to Medicaid Trusts for Accessing Funds
If maintaining access to assets is a priority, other estate planning tools may be more suitable:
1. Medicaid-Compliant Annuities
- Converts assets into an income stream, allowing Medicaid eligibility while still providing financial support.
- Income is counted toward Medicaid limits, but the principal is protected.
2. Irrevocable Funeral Trusts
- Funds set aside for funeral expenses are exempt from Medicaid asset calculations.
- Ensures burial and funeral costs are covered without affecting Medicaid eligibility.
3. Spousal Transfers and Planning
- In some cases, assets can be transferred to a spouse without violating Medicaid's look-back rules.
- A spousal annuity or trust can help protect assets while ensuring support for the healthy spouse.
Common Medicaid Trust Alternatives and Their Benefits
| Alternative | How It Works | Medicaid Impact |
|---|---|---|
|
Medicaid-Compliant Annuity |
Converts assets into an income stream |
Income is counted, but principal is protected |
|
Irrevocable Funeral Trust |
Prepares funds for burial expenses |
Exempt from Medicaid asset limits |
|
Spousal Transfer |
Transfers assets to a healthy spouse |
Allowed under Medicaid rules, but must follow spousal limits |
|
Life Estate Deed |
Grants future ownership of property to heirs while retaining the right to live in it |
May protect the home from Medicaid estate recovery |
When to Set Up a Medicaid Trust
The best time to set up a Medicaid trust is well before the need for long-term care arises. Since Medicaid's five-year look-back period can delay eligibility, early planning ensures that assets are protected when Medicaid benefits are needed.
Signs You Should Consider a Medicaid Trust:
✔ You want to protect assets from Medicaid spend-down rules.✔ You anticipate needing long-term care in the future.✔ You have significant assets that exceed Medicaid limits.✔ You want to preserve wealth for your heirs while maintaining Medicaid eligibility.
Contact an Attorney for Medicaid Trust Planning
Setting up a Medicaid Asset Protection Trust requires careful legal planning to ensure compliance with Medicaid rules while maximizing asset protection. An experienced estate planning attorney can help structure your trust to balance Medicaid eligibility and financial security.
For personalized legal assistance, contact Heritage Law Office by calling 414-253-8500 or filling out our online contact form.
Frequently Asked Questions (FAQs)
1. What happens to a Medicaid trust after the grantor passes away?
After the grantor's death, the Medicaid trust assets are distributed to the beneficiaries according to the trust's terms. Because the assets were protected from Medicaid, they are preserved for heirs rather than being used to pay for long-term care expenses. However, Medicaid may attempt estate recovery in some cases, depending on how the trust was structured.
2. Can Medicaid take assets from a Medicaid trust?
No, Medicaid generally cannot claim assets in a properly structured irrevocable Medicaid trust because the grantor has given up ownership and control over them. However, if the trust is not correctly set up, Medicaid may still count the assets as available resources, potentially affecting eligibility.
3. Can a Medicaid trust be revoked or changed?
Once established, a Medicaid Asset Protection Trust is irrevocable, meaning it cannot be revoked or changed by the grantor. The trust's terms must be carefully planned from the start, as modifications typically require court approval and could risk Medicaid disqualification.
4. Can a Medicaid trust own a home?
Yes, a Medicaid trust can own a home, and in some cases, this can be an effective way to protect the home from Medicaid estate recovery. However, transferring a home into the trust must be done correctly to comply with Medicaid's look-back period and asset rules.
5. Who should be the trustee of a Medicaid trust?
The trustee should be someone other than the grantor-typically a trusted family member, attorney, or professional fiduciary. The trustee is responsible for managing the trust's assets and ensuring distributions comply with Medicaid rules to maintain the grantor's eligibility.