If you listen to talk radio, then there’s a good chance that you’ve heard an advertisement from a law firm preaching the benefits of Medicaid Trusts. They are a great option for many families, especially for the late-middle-aged, moderate to high income demographic that listens to talk radio. If I’m describing you, please read on.
Simply speaking, a Medicaid Trust is a mechanism that allows you to keep your home (or other assets) in your family, even if you need the government to step in and pay for your nursing home expenses. Considering the housing prices in eastern Massachusetts, the benefits can be truly tremendous.
To better understand how a Medicaid Trust works, let’s first take a look at what happens without one. If an individual becomes unable to care for themselves and requires long-term care, either in a nursing home or at home, then they must pay for it. The average cost of a nursing home in Massachusetts is around $11,000 per month. At this rate, it doesn’t take long for someone to run out of money. Once the person has less then $2,000 left, they can qualify for Medicaid (called MassHealth in Massachusetts), which will cover their long-term care expenses moving forward.
If the person receiving long-term care owns a home, then MassHealth will put a lien on the home for the amount spent on long-term care costs. If the home is sold during the individual’s lifetime, then the proceeds will pay the lien. If the remainder of the proceeds bring the person over the $2,000 asset limit, then they will have to spend down the excess or lose MassHealth coverage. If the person retains their home until their death, then MassHealth can seek repayment from their estate through a process called MassHealth Estate Recovery.
Please note, if the person requiring long-term care is married, there are some other protections in place, which I will cover in future posts.
The best protection against losing your home to long-term care expenses is the Medicaid Trust. Here’s how it works.
Legally speaking, a Medicaid Trust is also known as an Income Only Irrevocable Trust. The assets of the trust are divided into two categories, principal and income. The person who establishes and funds the trust is called the Grantor. The terms of the trust require that the Grantor receive all income generate by the trust. Income includes interest on bank accounts, dividends from stock, rent from investment real estate, etc. If the trust owns the Grantor’s primary residence, then income includes the right to use and occupancy of the premises. This means that you can keep your home.
The terms of the trust also dictate that the Grantor has no access to the principal of the trust. The principal is the equity of the trust property itself, as distinct from the income that it generates. To better understand the concept, think of it this way: If you could sell the assets of the trust, the sale price would be the principal (and if you could rent the assets of the trust, the rental price would be the income).
Forgoing access to the principal is a significant limitation on the Grantor, but the practical impact of a Medicaid Trust on the Grantor’s lifestyle is actually quite small. This is because the main asset of the trust is the Grantor’s primary residence, and the Grantor retains the right to use and occupancy as part of his income interest.
So how does MassHealth treat Medicaid Trusts? Strictly speaking, if the trust is a true Income Only Irrevocable Trust, MassHealth doesn’t count the trusts assets against the $2,000 asset limit. However, the transfer of property to the trust is heavily scrutinized by MassHealth. If an individual applies for MassHealth within five years of transferring property to an irrevocable trust, then MassHealth will impose a period of ineligibility do to the disqualifying transfer. The specific ineligibility period depends on the size of transfer, and transfers of real estate tend to be quite large. Fortunately, if you make the transfer more than five years before you need MassHealth to cover long-term care, then you have successfully protected your largest asset, and can pass it on to your next of kin.
So that is how Medicaid Trusts work in a nutshell. Of course each aspect of this description has its own nuances and quirks, and I could write volumes on any of them. I’ll leave you with this forest-level view for now, and take a closer look at some of the trees in later posts.
If you’re interested in learning more about Medicaid Trusts, or other estate planning topics, please continue reading my blog. If you’d like to know how these techniques could benefit you specifically, feel free to contact me for a consultation. My Massachusetts Estate Planning Law Office is in Danvers, and I represent families on the North Shore, in the Merrimack Valley, and throughout Greater Boston.