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What is a Medicaid Trust?

A Medicaid Trust is a special irrevocable trust created by you during your lifetime for the purpose of holding title to your home and other assets.  The Medicaid Trust can maintain your right to live in your home, as well as the right to choose the trustees.  Because these trusts offer management and legal protection of the assets you place in them, they provide an excellent option for those who are concerned about protecting their estates from the impact of nursing home care costs.  Nonetheless, there are important factors that must be considered to determine if it is the right choice for you.

Medicaid trusts are irrevocable.  Therefore, once you create one you cannot change it.  This is usually not a problem, since all of the trust’s instructions are written by you to benefit only you and others of your choosing.  You can also retain the right to use all of the income earned by the trust’s assets.  Further, by prohibiting your access to the principal in the trust, those assets (including your house) are not considered owned by you when determining your Medicaid eligibility.

However, you need to be aware that a transfer of your house or other property into your Medicaid Trust will be treated as a divestment that will trigger a penalty period.  This means that it is best to create your Medicaid Trust and transfer your property into it while you are still healthy.  The goal is to create and fund your trust and complete the entire lookback period well before you need to apply for Medicaid.

A Medicaid Trust can be drafted to allow you to change beneficiaries and direct the distribution of trust property to your beneficiaries at your death.  More importantly, it can allow the distribution of trust property to your beneficiaries during your lifetime.  Since the divestment occurred when the property went into the Medicaid Trust, distributions during the lookback period can be made to your beneficiaries without creating a penalty period.  Because your property is held in trust you eliminate the concern that your property is lost because a child divorces, dies, or gets sued.  The Medicaid Trust also allows your beneficiaries to receive the tax benefits of receiving property as an inheritance rather than as a gift.

To summarize, there are substantial advantages to creating and funding a Medicaid Trust.  needless to say, special knowledge and skill is needed to draft a Medicaid Trust so that it complies with both federal and state law.