A simple way to plan for Medicaid for a married couple is for each spouse to create a trust under will (such as a testamentary trust) for the benefit of the surviving spouse in their estate plan. The trust must have a discretionary distribution standard so that the trustee has no obligation to use the trust assets to support the surviving spouse. The surviving spouse may not serve as sole trustee of this type of trust. Currently, funding of a testamentary trust for the benefit of the surviving spouse is not treated as divestment by the State of Michigan and is, therefore, not subject to the rule that says asset transfers must take place five years prior to a Medicaid application in order to avoid a penalty.
The Irrevocable Income-Only Trust
The irrevocable income-only trust is a form of gift trust to which the Settlor (the person who creates the trust) might transfer assets, such as marketable securities, or real estate, such as a family cottage. These trusts allow the client to make substantial asset transfers and (i) choose the family member or other person who will manage the assets, (ii) protect the assets from creditors (including divorces) of his or her children and (iii) retain some rights in the trust assets, including the right to receive income. The transfers to the trust are a gift for Medicaid purposes and must take place five years prior to a Medicaid application in order to avoid a penalty. After the five-year look-back period has expired, the trust principal is no longer countable, although the income from the trust must be disclosed and included in a Medicaid application. The Settlor must be comfortable giving up control of assets before establishing this type of trust.
Families or individuals may convert countable assets to assets that are exempt under Medicaid law. Examples of this include spending cash on repairs to the home, prepaying funeral expenses, purchasing tangible personal property, etc.
Sole Benefit Trusts
For married couples who need immediate care for one of the spouses, the planning method most commonly used is a Sole Benefit Trust. This is a trust for the sole benefit of the "community spouse" - the one who is not in long-term care and allows immediate Medicaid qualification for the ill spouse. Transfers to a trust for the sole benefit of a spouse are not considered divestment under Medicaid rules if the trust meets certain requirements. There is no payback requirement with a Sole Benefit Trust. With proper planning, the assets in a Sole Benefit Trust may remain exempt, even if the community spouse dies before the spouse in the nursing home.
However, if the community spouse later requires nursing home care, the assets in the trust will be entirely countable to that spouse. At that point, it may be best to unwind the trust, either by exercise of trustee discretion or court order, and use the remaining assets to purchase exempt assets or engage in half-a-loaf gifting.
"Half-a-loaf" planning is usually used for single Medicaid applicants or married couples when both spouses need immediate care. It involves making a gift of approximately half the countable assets and then using the remaining countable assets to purchase a short-term annuity that, when combined with the applicant's other income, will be just under the nursing home private pay rate. This income can be used to pay the nursing home bill during the penalty period that results from making a gift within the five year look back period. The amount that can be gifted requires careful calculations that take into account the applicant's income and the nursing home private pay rate.
Gift and Wait
If there are significant assets, it may be possible to save more by making a large gift and then waiting out the five-year look-back period. This strategy is often most effective if the client or the client's spouse was a veteran who served during a period of conflict. In that case, the large gift may result in the veteran being eligible for a special pension available from the U.S. Department of Veterans' Affairs for long-term care costs. Clients considering a gift and wait strategy need to consider loss of control issues, the need for a trust to protect assets against potential creditors of the donees and capital gains tax issues.
Planning can be done to avoid or minimize the effects of estate recovery. Estate recovery involves the state making a claim against the home or any other exempt assets of a Medicaid recipient after death. The planning required is quite simple but may change because of proposed changes to the estate recovery program.
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