Medicaid is a need-based program for people who cannot afford to pay for their medical care. You must meet income and asset requirements to be eligible.
When you set up a trust, technically you do not own the money and assets in the trust unless you are the trustee. The trustee owns it and gives out the assets according to the arrangements of the trust. The interest you receive from the trust is income, but you do not have access to the rest, or principal, of the trust.
Previously, people would escape the asset limit for Medicaid by putting their money into trusts. However, that loophole has been largely closed. Now, when you set up a revocable trust, the income is counted toward your income limit, and the principal will probably be counted as an asset. It is unlikely that you will be able to exclude any income you receive, and you cannot exclude the principal as an asset except in limited circumstances.
Another type of trust is called an irrevocable trust. A trust is irrevocable when there are restrictions on your access to the principal. In the past, some irrevocable trusts were not counted as an asset. However, now, if there is any chance that the principal of the trust can be used for your benefit, the principal will be counted as an asset. For example, say you have a trust worth $50,000. The trust states that $50 per month is to go to you. Also, the trust states that if you have a heart attack, you can have the rest. Unless you have a heart attack, you cannot get to that $50,000. But, because there is some possible way for the money to be used for your benefit, it will be counted as an asset. Likewise, the $50 per month will be counted as income. If there were no way the principal could be used for your benefit, then and only then would it not be counted as an asset.
If you set up an irrevocable trust that cannot be used for your benefit, be aware of a few things. First, if you do create and title assets such a trust, you may have a period of disqualification from long-term care Medicaid, which acts as a penalty. Medicaid will not allow you to just take your money and give it to someone else so that you can apply for Medicaid. This practice is called an uncompensated transfer of assets.
Medicaid will penalize you for any uncompensated transfers of assets you make within a certain time period directly prior to the time you apply for long-term care Medicaid benefits. That period of time is called the “look-back period” and the Deficit Reduction Act of 2005 (DRA) required state Medicaid programs to change the look-back period to 60 months for transfers made after February 8, 2006. In March 2009, West Virginia implemented this change and the look-back period is now 60 months for any resource transfer, whether or not a trust was involved. The penalty period begins when you are both eligible for and receiving long-term care that would be covered if not for the penalty, and after any other penalty periods imposed have expired.
The penalty is disqualification from long-term care Medicaid coverage (nursing home care or Medicaid waiver program) for a period of time. If you transferred your assets into an irrevocable trust that could not be used in any way for your benefit, you would be penalized. If you were trying to obtain nursing home care, you would be disqualified for as many months as it would take for you to use up the assets you placed in the trust toward your care. Your penalty period will not begin until you need the benefits and you no longer have more than $2,000 in assets.
Some transfers may not result in penalties. Transfers made before the beginning of the look-back period are not penalized as uncompensated transfers of assets. A hardship provision also exists. This provision allows the exclusion of a trust when counting it would result in undue hardship for the client. Decisions about undue hardship are made by the Director of the Office of Family Support.
It is also important to remember that if you are unable to get to the money in a trust, you cannot use it, so it may not be to your advantage to set up an irrevocable trust. You may benefit more from the use of your money even though you are not able to get Medicaid. Before setting up a trust, you may want to examine these issues. Medicaid laws and trusts in general can be very complicated. Consequently, if you are interested in setting up a trust, you should consult an attorney who is experienced in Medicaid planning.
For more information, see: 42 U.S.C. §§ 1396p, 1396a (2015); West Virginia Department of Health and Human Resources, Income Maintenance Manual, §§11.4(TT), 17.10(B)(3), 17.10(B)(12), http://www.wvdhhr.org/bcf/family_assistance/policy.asp (last visited May 26, 2015); Joan M. Krauskopf et al., Elderlaw: Advocacy for the Aging §§ 11.29, 11.42-.46 (2nd ed. 1993).