Living Trust and Medicaid

You've probably gotten a postcard or seen an ad for a seminar on "Living Trusts" and all the benefits they supposedly offer you. Basically, a Living Trust is a trust you create and fund during your life and which you retain the ability to change and revoke at any time. They have their place and can be quite useful, in the right circumstances, but the question of today is whether they are useful if you may be applying for Medicaid.

The problem with Living Trusts for someone applying for Medicaid is that everything titled in the name of the Living Trust is considered an available asset, even if it was exempt outside of the Living Trust. For instance, your home is exempt (up to $500,000), but if you deed it into your Living Trust, it suddenly loses its exemption. That alone can cause you to become ineligible for Medicaid, forcing you to deed your house out of the Trust back into your own name. The same would be true of your car or even your other personal property.

Now bank accounts and investments can certainly be titled in the name of the Living Trust, since such assets are countable whether they are titled in your name or in the Trust's name. However, if you are single, you will have to spend down those assets in any case, in order to qualify for Medicaid, so that's a dubious benefit.

Since you basically have to withdraw all the Trust assets and retitle them back into your own name, as you can see it makes absolutely no sense to pay an attorney to create a Living Trust for you if you are single and facing long-term care, and if you think that you may need or want to apply for Medicaid at some point.

If you are married, it is possible for the Community Spouse (i.e., the spouse not in the nursing home) to have assets titled in the name of a Living Trust, but there is usually little advantage to doing so in a state like Colorado which has relatively inexpensive and simple probate procedures.

As a matter of fact, there is a type of trust that the Community Spouse can set up to be funded after the death of the Community Spouse, which can hold assets for the benefit of the nursing home spouse yet not count against that spouse's Medicaid eligibility. However, such a trust cannot be used in a Living Trust and can only be used in a Will.

So the lesson of all this is that Living Trusts may be useful for general estate planning purposes but are inappropriate--or worse--in a Medicaid planning situation.

K. Gabriel Heiser is an attorney with over 25 years experience in elder law and estate planning. Heiser is the author of “How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets,” an annually updated practical guide for the layperson. For more information about this book, visit Medicaid Secrets. Read more about the pitfalls of using a living trust for medicaid planning at medicaid trust.

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