Drafting Wills and Trusts with Medicaid in Mind

Amelia Crotwell, CELAElder Law of East Tennessee

903 N. Hall of Fame Dr.Knoxivlle, TN 37917

www.elderlawetn.com

Certified by the National Elder Law Foundation

This presentation is available at https://www.elderlawetn.com/resources/

Planning for Medicaid using Wills and TrustsI. Who is eligible for Medicaid?II. Last Wills and MedicaidIII. Irrevocable Trusts and MedicaidIV. Revocable Trusts and MedicaidV. Special Needs Trusts

I. Who is eligible for Medicaid?

• Categorically eligible: over age 65, blind, have disability and meet income and resource limits

• SSI vs. 209(b) states

Technical, medical, and financial eligibility• Technical: US citizen or qualified noncitizen; variations by

state• Medical:

• 65+ years old, meet SSA definition of disability or blindness; state may impose other restrictions

• Physician’s or certified assessor’s documentation of needed level of care/assistance with ADLs

• Financial: income and asset tests

Financial eligibility single applicants• Income

• Monthly gross income not exceeding 300% of SSI benefit rate• 2017: 300 x $735 = $2,205

• Options such as QIT for income exceeding limit (varies state to state); may include payback provisions

• Assets: countable vs. exempt• Countable asset limit: $2,000 (single) or $3,000 (married)• Exempt assets:

• Primary residence & surrounding land ≤ $560,000 (2017)• Household goods & personal property • Vehicle• Burial spaces for immediate family and burial funds ≤ $1,500 per spouse• Life insurance with combined face value ≤ $1,500

Married vs. single applicants: income

• Income of community spouse (CS) not considered available to institutionalized spouse (IS)

• IS’s income may be available to CS• Income-first Rule: CS may keep enough to live on

• Minimum Monthly Maintenance Needs Allowance (MMMNA -$2,002.50 in 2016)

• Income shifted to CS before excess assets permitted• Following death of IS, CS may have less income/fewer assets

Married applicants: assets

• Countable assets of both spouses considered• “Unavailable” resources not considered• Retirement accounts• Community Spouse Resource Allowance (CSRA)

• 2017: $23,844 minimum, $120,900 maximum• TN: community spouse may keep ½ of countable assets; no more

than $120,900• Resource Assessment: snapshot of resources on first day

one spouse is institutionalized for at least 30 days

II. Last Wills and Medicaid

• Vehicle to plan for Medicaid and special needs beneficiaries• Testamentary trust appropriate except:

• Self-settled SNTs• Sole benefit trusts• Asset protection trusts created 5+ years before anticipated

Medicaid application filing date• Why use them?• Who has all the assets?

Testamentary trusts• Spouses: 42 U.S.C. §1396p says a person may leave

assets to spouse only via trust under LWT• Each spouse should create SNT within LWT – maximum flexibility• Elective share• Contingent vs. forced SNT• Review beneficiary designations• No payback provision required• Avoid limiting spouse’s share of marital estate to elective share• Muniment of Title and probate

• Non-spouses: either forced or contingent; no payback provision

III. Irrevocable Trusts and Medicaid

• Strategy for pre-crisis planning or crisis planning for person with significant assets whose care needs will extend beyond five years

• Leaving a legacy protected from liability, divorce, or catastrophe• Protecting family farm• Economic security for CS• Obtaining Medicaid benefits• Avoiding probate• Alternative for people who can’t get LTC insurance

• Countable asset if payment could be made to or for benefit of person applying for benefits

Funding date and five-year lookback

• Funding date: NOT the date of trust agreement execution• Date the last dollar/asset is placed in trust• Begins five-year waiting period for Medicaid

• Lookback period• Any transfers or gifts for less than fair market value considered

countable• Countable transactions used to determine penalty period (time

from date of application during which no benefits can flow)• Penalty divisor 5472

Asset protection trust requirements• Irrevocable• Trustmaker ≠ trustee• Trustmaker ≠ principal beneficiary• Trustmaker must not have power to borrow from trust assets• Trustmaker can be income beneficiary

Asset protection trust tips• Trustmaker may retain interest in income of trust• Trustmaker may continue to live in trust residence• Qualify trust as “grantor” trust for tax purposes• Trustmaker should retain testamentary limited power of

appointment• Trust protector/advisor and/or decanting provisions can help

solve problems• Contingent SNT is best practice• Include spendthrift clause

Asset protection trust considerations

• Tax advantages• Grantor trust status: trust income taxed to Trustmaker• Deferred gains on annuities not recognized as gains (use SSN)• Avoid capital gains on sale of primary residence under IRC §121

• Trustmaker has ability to control distribution of assets after death but gives up control over assets during life

• Long-term protection of family assets• Divorce, bankruptcy, etc.

IV. Revocable Trusts and Medicaid

• Estate planning tool for person not seeking asset protection and who wants to maintain control of assets during life

• Asset management during Trustmaker’s life• Probate avoidance after Trustmaker’s death

• Assets in trust subject to Medicaid eligibility rules (countable)

• Primary residence may be considered exempt (varies by state)

Revocable trust with pour over to LWT

• Strategy for healthy couple who don’t want irrevocable trust• Assets “pour over” to probate estate of first spouse to die• Used to fund SNT for surviving spouse• SNT contained within last will of decedent• No asset protection while both spouses are living, but asset

protection after first death with no lookback• In TN, assets in revocable trust countable and available to

beneficiary• Distributions characterized as income or transfers of assets

Revocable trust considerations

• Caution: funding trust with exempt assets may make them countable

• Assets in trust may be subject to estate recovery

V. Special Needs Trusts

• Third party• First party d4A (under age 65)• First party d4C (any age) – “pooled trust”• Sole benefit

Third party SNT

• Created by third party with assets of third party• Benefits person of any age with disability (as defined by

SSA)• No payback provision on death of beneficiary or liens on

corpus of trust• Revocable grantor trust or irrevocable non-grantor trust• Beneficiary must not have right to compel distribution• Consider for all estate plans where beneficiary has or may

develop a disability

First party d4A trust

• Created for person with disability under age 65 using his or her own assets

• Created by parent, grandparent, conservator, court, or beneficiary with disability

• Used to handle large sum of money (inheritance, personal injury award) to prevent loss of benefits

• Only one beneficiary• Limited trust additions after age 65 in TN• Payback provision

First party d4C trust (pooled trust)• Pooled trust may be an option depending on state rules re:

age of Trustmaker• Avoids loss of Medicaid eligibility for person with disability• Payback provision

• Appropriate for person with disability of any age (TN)• Established and managed by non-profit; separate account

for each beneficiary• Person with disability or parent, grandparent, conservator,

or court may establish trust account• Payback provision

Sole benefit trust• Hybrid of third party SNT and d4A SNT• Benefits both Trustmaker and beneficiary with special

needs• Trustmaker wants to qualify for Medicaid immediately but is over-

resourced• Trustmaker’s child, grandchild, spouse under age 65, or other

person has a disability• Trustmaker’s excess resource gifted to trust – exempt from

five-year lookback• Payback provision on death of beneficiary OR equal

payments from trust during beneficiary’s expected lifetime