Medicaid Trusts & Supplemental Income Rules

Medicaid planning is a crucial aspect of estate planning for individuals who may require long-term care. A Medicaid trust can help preserve assets while ensuring eligibility for Medicaid benefits. However, strict rules govern income and assets, particularly when it comes to supplemental income and how it affects Medicaid eligibility. Understanding these regulations is essential for effective asset protection and long-term care planning.

If you are concerned about qualifying for Medicaid while protecting your estate, an experienced Medicaid planning attorney can help. Contact us by either using our online form or calling 414-253-8500 for legal assistance.

Understanding Medicaid Trusts

A Medicaid trust is a type of irrevocable trust designed to help individuals meet Medicaid eligibility requirements while protecting their assets from being counted as available resources. There are different types of Medicaid trusts, each serving specific needs:

• Medicaid Asset Protection Trusts (MAPTs) - These trusts allow individuals to transfer assets out of their estate while still benefiting from them indirectly. The goal is to reduce countable assets for Medicaid eligibility. Learn more about Medicaid Asset Protection Trusts.
• Special Needs Trusts - These trusts provide for disabled individuals without jeopardizing their Medicaid benefits. Learn more about special needs planning.
• Testamentary Trusts - Established through a will, these trusts can provide for a spouse or dependent while preserving Medicaid eligibility. Learn more about testamentary trusts.

These trusts must be carefully structured to comply with Medicaid's five-year lookback period, which penalizes certain asset transfers made within five years before applying for Medicaid.

How Supplemental Income Affects Medicaid Eligibility

Medicaid has strict income limits, and any supplemental income received by a Medicaid applicant can affect eligibility. The following income sources must be considered:

• Social Security Benefits
• Pension Payments
• Rental Income
• Dividends & Interest
• Distributions from Trusts

Income Caps and Spend-Down Strategies

Each state has different income limits for Medicaid eligibility. If an individual's income exceeds the allowable limit, they may still qualify by using Medicaid spend-down strategies, such as:

• Paying for Medical Expenses - Using excess income for medical costs until reaching Medicaid's income limit.
• Miller Trusts (Qualified Income Trusts) - Directing excess income into a trust that pays for long-term care while preserving Medicaid eligibility.
• Purchasing Annuities - Converting excess assets into income streams that comply with Medicaid rules.

Proper planning is essential to ensure that any supplemental income does not disqualify a person from receiving Medicaid benefits.

Trust Distributions and Medicaid Rules

Medicaid considers trust distributions as countable income if they provide direct financial benefits to the applicant. However, the way a trust is structured determines how distributions impact eligibility:

Revocable vs. Irrevocable Trusts

• Revocable Trusts - Assets in a revocable trust are considered available resources for Medicaid, meaning they do not provide protection for eligibility purposes. Learn more about revocable trusts.
• Irrevocable Trusts - Assets placed in an irrevocable trust are generally not counted as available resources, provided they comply with Medicaid's five-year lookback period. Learn more about irrevocable trusts.

Key Differences Between Revocable and Irrevocable Medicaid Trusts

Feature	Revocable Trust	Irrevocable Trust
Medicaid Eligibility	Assets are countable and affect eligibility	Assets are generally protected if transferred before the lookback period
Control Over Assets	Grantor retains full control	Grantor gives up control to the trustee
Ability to Change Trust	Can be modified or revoked	Cannot be changed or revoked once established
Creditor Protection	Offers little to no protection	Shields assets from Medicaid and some creditors
Tax Treatment	Income is taxable to the grantor	May be taxed separately depending on structure
Common Uses	Estate planning, probate avoidance	Medicaid planning, asset protection

How Medicaid Views Trust Income

Medicaid classifies trust income in two ways:

1. Income Available to the Beneficiary - If the trust allows direct distributions of cash or assets to the Medicaid applicant, those funds are counted as income and may disqualify them from benefits.
2. Income Paid to a Third Party for the Beneficiary's Benefit - If the trust pays directly for services (such as housing or medical expenses), Medicaid may still consider it an available resource, depending on state rules.

Proper structuring of a trust ensures that income does not negatively affect Medicaid eligibility.

Medicaid's Five-Year Lookback Period

One of the most critical rules in Medicaid planning is the five-year lookback period. This regulation penalizes asset transfers made within five years before a Medicaid application, potentially delaying eligibility. Key considerations include:

• Gifts & Transfers - Any assets given away within the lookback period can trigger a penalty period during which Medicaid will not cover long-term care.
• Exempt Transfers - Certain transfers, such as those made to a spouse, disabled child, or a trust for a disabled individual, may be exempt from penalties.
• Curing Penalties - In some cases, improperly transferred assets can be returned to reduce or eliminate penalties.

Proper advance planning can help avoid Medicaid penalties and ensure a smooth transition into benefits.

Protecting Assets While Maintaining Medicaid Eligibility

To ensure Medicaid eligibility while preserving assets, individuals can use a combination of strategies:

• Medicaid Asset Protection Trusts (MAPTs) - These trusts allow assets to be shielded from Medicaid while still providing indirect benefits.
• Pooled Income Trusts - Often used by disabled individuals, these trusts hold excess income while allowing the individual to remain eligible for Medicaid.
• Caregiver Agreements - A formal agreement between a Medicaid applicant and a family member that allows payments for caregiving services without triggering a Medicaid penalty.

Each situation is unique, so consulting with an experienced Medicaid planning attorney is essential for proper legal structuring.

Contact a Medicaid Planning Attorney

Medicaid planning is complex, and mistakes can result in costly penalties or loss of eligibility. If you need assistance with Medicaid trusts, supplemental income rules, or long-term care planning, we can help.

Contact Heritage Law Office today by using our online form or calling 414-253-8500 to discuss your options.

Frequently Asked Questions (FAQs)

1. What is the purpose of a Medicaid trust?

A Medicaid trust is designed to protect assets while ensuring eligibility for Medicaid benefits. By transferring assets into an irrevocable trust, individuals can meet Medicaid's resource limits while preserving wealth for their heirs.

2. How does Medicaid's five-year lookback period affect asset transfers?

Medicaid examines financial transactions from the past five years to determine if an applicant has transferred assets to qualify for benefits. If assets were given away or transferred improperly, Medicaid may impose a penalty period delaying coverage.

3. Can I receive income from a Medicaid trust?

If you receive direct income from a Medicaid trust, it may count against Medicaid eligibility. However, if the trust pays for services like housing or medical expenses directly to a third party, it may not count as available income, depending on state laws.

4. What is the difference between a Medicaid Asset Protection Trust (MAPT) and a Special Needs Trust?

A Medicaid Asset Protection Trust (MAPT) is used to protect assets from Medicaid spend-down requirements, while a Special Needs Trust is designed to provide for a disabled person's needs without affecting their eligibility for government benefits.

5. How can I legally reduce my income to qualify for Medicaid?

Legal strategies to reduce income for Medicaid eligibility include using a Miller Trust (Qualified Income Trust), purchasing Medicaid-compliant annuities, and spending down excess income on medical expenses or other allowable costs.