Medicaid Trust

What is a Medicaid Trust?

With a rapidly growing elder population, long-term care planning has become an increasingly popular subject. What happens when you can no longer live independently? Most people have heard horror stories of older adults suddenly debilitated by illness and forced to use their life savings to pay exorbitant nursing home bills. No one likes to think about getting old. Unfortunately, many of us fail to plan for the possibility of needing round the clock care. Neglecting to develop a sound long-term care plan can have devastating consequences for your spouse and other loved ones.

Because Medicare will only pay for up to 100 days of skilled nursing care, it is necessary to find other funding sources to cover an extended or permanent stay in a nursing facility. One popular choice is disability or term life insurance, however, these policies can be prohibitively expensive and difficult to obtain as you age – assuming you qualify at all.

To avoid paying out of pocket and watching a life’s worth of savings and retirement rapidly drain away, many people look to Medicaid to foot the bill. This is referred to as a “Medicaid Trust” and it requires a great deal of advanced careful planning in order to work.

Although they share similar names, Medicare and Medicaid are separate programs with two very different purposes. Medicare is an entitlement program administered by the Federal government. Nearly everyone age 65 and older is entitled to receive Medicare, which serves as health insurance for the nation’s senior population. Medicaid, on the other hand, is a type of welfare administered by the individual states. In order to qualify for Medicaid benefits, you must meet the indigency requirements under your state’s laws. When people talk about a Medicaid Trust, they are referring to a type of trust that will shield their assets from Medicaid. By setting up a Medicaid Trust, you are deliberately making yourself poor enough to receive state assistance.


A Medicaid Trust is simply an irrevocable trust where you essentially give away your assets. Once assets are placed in an irrevocable trust, they cannot be taken back out. You lose control of these assets and no longer have a legal interest in them. This is why a revocable living trust will not work for Medicaid purposes: In order to qualify for Medicaid, you cannot control or maintain an interest in any assets. With a Medicaid Trust, you can still receive income from the assets, but you can never access the principal, nor can the trustee make payments to you out of the principal. After your death, the trustee can continue making distributions to your spouse or, depending on the terms of the Trust Agreement, pay out distributions to the trust beneficiaries and dissolve the trust.

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UPDATE: Holiday sale in progress at Medicaid Secrets. Medicaid expert Gabriel Heiser also has written an even more indepth book for attorneys and financial advisors.

To most people, this seems like a drastic measure – and it is. Because you cannot serve as your own trustee in a Medicaid Trust, you must be absolutely certain the trustee you choose is financially responsible and trustworthy. You must also be careful not to unnecessarily delay funding the Medicaid Trust. Funding a trust simply means transferring assets out of your name into the name of the trust. Under the federal Deficit Reduction Act (DRA), which was adopted in 2006, Medicaid implemented a five-year look-back rule. Under the look-back rule, the government can potentially recapture any assets you gave away or placed in a trust within five years of filing an application for Medicaid benefits. In order for a Medicaid Trust to function the way you intend, you must transfer assets to the irrevocable trust to be managed by another individual at least five years before applying for Medicaid.

As one might expect, there is a great deal of misinformation about Medicaid Trusts. Some estate planning professionals claim they can create trusts that will shield your assets from Medicaid and still magically:

  • allow you to continue to access the trust’s income,
  • give you the ability to replace the trustee, and/or
  • in some other way allow you to continue to benefit from the assets in the trust.

It is important to understand that each state interprets federal Medicaid guidelines according to its own codes and statutes. If someone promises you a trust in which you retain control over your assets while still qualifying for Medicaid, ask to see recent case law in your state that backs up this claim. The DRA has severely complicated the whole concept of a Medicaid Trust. As a result, it is important to consult with an experienced expert who routinely handles elder law matters in your state.

Despite the problems and potential pitfalls of Medicaid Trusts, there are ways to preserve your assets and still qualify for Medicaid.

In fact, Medicaid rules specifically authorize certain methods of preserving assets while still qualifying for Medicaid. To find out more read Medicaid Annuity.

The Medicaid (and SSI) rules are much more favorable if you are thinking about using your assets to support someone else – like a disabled child or someone with special needs. For more about that, read Special Needs or Disability Trust.

Here’s a great place to find more Medicaid planning information and even ask your Medicaid questions. You also can post your questions or comments below.

Visit Living Trust and Medicaid.

Other Medicaid Articles:

  • Medicaid Annuity
    Wonder what a Medicaid Annuity is? Should you get one? Find out here.

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