Common Mistakes in Medicaid Planning with Trusts

Medicaid planning with trusts is an effective strategy for protecting assets while qualifying for long-term care benefits. However, mistakes in structuring and managing these trusts can lead to disqualification from Medicaid, loss of assets, and unintended tax consequences. Understanding the common errors can help individuals and families avoid costly missteps.

If you need legal assistance with Medicaid planning, contact us by using our online form or calling 414-253-8500.

1. Using the Wrong Type of Trust

Not all trusts are suitable for Medicaid planning. Many people mistakenly believe that simply placing assets in a trust will protect them from Medicaid's asset limits, but revocable trusts do not offer protection because the grantor retains control over the assets. Instead, an irrevocable trust is typically required to shield assets from Medicaid eligibility calculations.

For example:

• Revocable Trusts → Counted as assets for Medicaid.
• Irrevocable Medicaid Asset Protection Trusts (MAPTs) → Properly structured, these trusts can protect assets while allowing Medicaid qualification.

To learn more about irrevocable trusts for Medicaid planning, visit our page on Medicaid Asset Protection Trusts.

Key Differences Between Revocable and Irrevocable Trusts for Medicaid Planning

Feature	Revocable Trust	Irrevocable Trust (MAPT)
Control Over Assets	Grantor retains full control	Grantor gives up control to trustee
Medicaid Eligibility	Assets are counted as available	Assets are protected if transferred before the look-back period
Flexibility	Can be modified or revoked at any time	Cannot be changed after creation (with limited exceptions)
Protection from Creditors	No protection	Provides protection from creditors and lawsuits
Estate Tax Benefits	No special benefits	May help reduce estate tax liability
Medicaid Estate Recovery	Subject to Medicaid recovery after death	Properly structured, assets are protected from recovery

2. Failing to Account for the Medicaid Look-Back Period

Medicaid imposes a five-year look-back period on asset transfers. If assets are transferred into a trust within five years before applying for Medicaid, it can result in a penalty period during which the applicant is ineligible for benefits.

Common errors include:

• Transferring assets too close to the Medicaid application date.
• Not considering the penalty period when funding the trust.
• Failing to seek professional guidance on timing asset transfers.

3. Naming the Wrong Trustee or Beneficiary

Choosing the right trustee is crucial because Medicaid rules prohibit applicants from having direct control over the assets in an irrevocable trust. Mistakes in trustee selection can lead to unintended consequences, including trust assets being deemed countable for Medicaid eligibility.

Common trustee-related mistakes:

• Naming the Medicaid applicant as trustee (which disqualifies the trust).
• Naming a trustee who does not understand Medicaid rules.
• Failing to name successor trustees, leading to complications if the primary trustee becomes incapacitated.

Similarly, improper beneficiary designations can cause issues. For example, naming a spouse as the sole beneficiary can create Medicaid eligibility problems for the surviving spouse.

4. Keeping Too Much Access to the Trust Assets

If a Medicaid applicant retains too much control over trust assets, Medicaid may determine that the assets are still available for their care. Some common mistakes include:

• Retaining the right to principal distributions, which makes the assets countable.
• Allowing the grantor to modify or revoke the trust, which defeats Medicaid protection.
• Failing to limit income rights, as excess income may affect Medicaid eligibility.

A properly structured irrevocable trust should ensure that the applicant cannot directly access principal and has limited or no control over trust assets.

5. Not Planning for Income and Taxes

Medicaid primarily focuses on asset limits, but income and taxes also play a role in eligibility and financial planning. Some common tax-related mistakes include:

• Creating a trust that increases the beneficiary's tax burden unnecessarily.
• Failing to consider capital gains tax implications when transferring assets.
• Not properly structuring the trust to allow for step-up in basis benefits upon death.

Additionally, some trusts generate income that may disqualify an applicant from Medicaid if not properly managed. A Medicaid planning attorney can help structure the trust to minimize these risks.

6. Improperly Funding the Trust

Setting up a Medicaid Asset Protection Trust (MAPT) is only part of the process-properly funding the trust is just as important. Many people mistakenly assume that simply creating the trust is enough, but if assets are not legally transferred into the trust, Medicaid will still count them as available resources.

Common funding mistakes include:

• Failing to retitle real estate in the name of the trust.
• Leaving financial accounts in personal ownership instead of transferring them to the trust.
• Not updating beneficiary designations for life insurance or retirement accounts, which could lead to unintended Medicaid consequences.

To ensure the trust serves its intended purpose, every asset intended for Medicaid protection should be properly retitled and transferred into the trust under the guidance of an attorney.

7. Overlooking Spousal Protections

For married couples, Medicaid has special rules to protect the healthy spouse (community spouse) when the other spouse requires long-term care. A common mistake in Medicaid planning is failing to take full advantage of spousal impoverishment protections, which can lead to unnecessary financial hardship.

Errors include:

• Transferring too many assets into a trust, leaving the healthy spouse without enough resources.
• Failing to utilize spousal refusal or resource allowances, which can legally protect additional assets.
• Not structuring the trust correctly to avoid Medicaid estate recovery after the institutionalized spouse's passing.

Married couples should work with an attorney to ensure that Medicaid planning strategies balance asset protection with spousal financial security.

8. Ignoring Medicaid Estate Recovery

Many people assume that once they qualify for Medicaid, their assets are permanently protected. However, after a Medicaid recipient passes away, the government can seek reimbursement for benefits paid through the Medicaid Estate Recovery Program (MERP). If assets are not properly structured, Medicaid may attempt to recover funds from the estate, including assets held in certain types of trusts.

To avoid Medicaid estate recovery mistakes:

• Use properly structured irrevocable trusts to remove assets from the Medicaid estate.
• Ensure that the trust does not allow access to the principal by the Medicaid recipient.
• Avoid naming the estate as a beneficiary, which can expose assets to recovery claims.

Proper planning can prevent Medicaid from reclaiming assets intended for heirs.

9. Not Regularly Reviewing the Trust

Medicaid laws and regulations change over time, and trusts should be reviewed periodically to ensure they remain compliant. Many individuals set up a trust but fail to update it when circumstances change, leading to costly mistakes.

Situations requiring a trust review include:

• Changes in Medicaid laws that affect asset eligibility.
• Marriage, divorce, or death of a spouse or beneficiary.
• Relocation to a different state, as Medicaid rules vary by state.

Regular trust reviews with an experienced Medicaid planning attorney ensure that the trust continues to meet legal requirements and effectively protects assets.

10. Attempting DIY Medicaid Planning

One of the biggest mistakes in Medicaid planning is attempting to navigate the process without professional legal guidance. Medicaid rules are complex, and errors can result in disqualification, financial losses, or unintended tax burdens.

Risks of DIY Medicaid planning include:

• Misinterpreting eligibility rules, leading to penalties or denials.
• Using the wrong type of trust, leaving assets unprotected.
• Failing to properly document transactions, which can raise red flags for Medicaid authorities.

Because Medicaid planning is highly technical, working with a knowledgeable Medicaid attorney is the best way to avoid costly mistakes and ensure eligibility while protecting assets.

Contact a Medicaid Planning Attorney Today

If you or a loved one are considering Medicaid planning with trusts, it is essential to avoid common mistakes that could jeopardize benefits or result in financial losses. An experienced Medicaid planning attorney can help you structure a trust correctly, comply with Medicaid regulations, and protect your assets.

For assistance with Medicaid trusts and asset protection, contact us today by using our online form or calling 414-253-8500.

Common Medicaid Planning Mistakes and Their Consequences

Mistake	Potential Consequence
Using a revocable trust	Medicaid will count trust assets as available resources, potentially disqualifying the applicant
Transferring assets within the five-year look-back period	Medicaid may impose a penalty period of ineligibility
Naming the wrong trustee	The trust may not function correctly, leading to loss of asset protection
Retaining too much control over the trust	Medicaid may consider the trust assets available, impacting eligibility
Not planning for spousal protections	The healthy spouse may lose access to necessary financial resources
Failing to update the trust	Changes in Medicaid laws may cause unintended disqualification

Frequently Asked Questions (FAQs)

1. What is the five-year look-back period for Medicaid?

The five-year look-back period refers to Medicaid's review of an applicant's financial transactions within the five years before applying for benefits. If assets were transferred to a trust or given away during this period, Medicaid may impose a penalty period of ineligibility. Proper Medicaid planning can help mitigate these penalties.

2. Can I use a revocable trust to protect assets for Medicaid?

No, revocable trusts do not protect assets from Medicaid because the grantor retains control over the assets, making them countable for Medicaid eligibility. Instead, an irrevocable trust, such as a Medicaid Asset Protection Trust (MAPT), is typically used to shield assets from Medicaid while allowing the applicant to qualify for benefits.

3. How does Medicaid estate recovery affect assets in a trust?

Medicaid estate recovery allows the state to reclaim costs paid for a recipient's care after their death. If a trust is not properly structured, Medicaid may attempt to recover assets from it. However, an irrevocable trust that removes assets from the applicant's control can help avoid estate recovery claims.

4. Can my spouse keep assets if I apply for Medicaid?

Yes, Medicaid has spousal impoverishment protections that allow the healthy spouse to retain a portion of the couple's assets. However, improper Medicaid planning can result in the unnecessary loss of assets. A Medicaid planning attorney can help ensure that assets are legally protected for the spouse.

5. What happens if I don't update my Medicaid trust?

Failing to update a Medicaid trust can lead to compliance issues due to changes in Medicaid laws, life events, or incorrect structuring. If the trust is not regularly reviewed, assets may be deemed countable for Medicaid, potentially disqualifying the applicant. It's important to review the trust periodically with an attorney to ensure continued protection.