The Minefield of Medicaid Trusts
In last week's article, we talked about a recent masshealth case that provided some clarity around Medicaid trusts. In this article, we are going to talk about some common traps to be wary of if/when doing Medicaid trusts. Please keep in mind that this article is only referring to Medicaid trusts in Massachusetts - states can vary on their approach and interpretation of Medicaid trusts. Also, this list is not exhaustive - I am only referring to some of the more common things to be aware of in this area of law.
Before I dive into the powers to avoid (or at least be extremely cautious about), you should know the basic rules of masshealth trusts:
Five year look back period - meaning if you transfer an asset to the trust, you are not protected unless 5 years have passed. Otherwise, you will have to do a calculation to determine your penalty/ineligibility period.
No access to principal - once an asset is transferred to the trust, you cannot have any access to the principal. For example, if you transferred your home to the trust and then put in a provision that allows the trustee to sell the home and distribute the proceeds to you, then those proceeds (derived from the equity in the home) would be considered a distribution of principal and therefore make the trust countable for masshealth purposes. Even if you don’t exercise such power, if there are any circumstances that may allow you, as the donor, to access the principal, then the trust is broken. This rule is known as the “any circumstances test” and is the reason for all the potential traps and uncertainty that will be mentioned below.
You cannot be a trustee and if you are married then your spouse cannot be a trustee of the trust. It’s common to name children as the trustees.
You may have a right to income from the property placed in trust (as opposed to principal), but that income will be countable for masshealth purposes.
Here are some of the most common traps to avoid:
Life estate provision - this provision grants you exclusive control and occupancy rights to your home. The problem with this provision is that masshealth can include the remainder value of your life estate (calculated by using your life expectancy) as countable for masshealth purposes. This is generally a no-no in today’s Medicaid planning in Massachusetts.
Use and occupancy provisions - this is a watered down version of the life estate. Instead of giving you exclusive control over the property, it merely says you can live there and/or enjoy use of the property. Right now this provision is a gray area. Masshealth could argue that if you have the right to live in your home rent free then it’s imputed income. Many Medicaid planners will avoid use of this clause to avoid potential problems down the road - although some may disagree.
Power to loan or borrow money from the trust - this provision can infringe upon the “any circumstances test,” so you should make sure it is not included in your trust.
Trust protector provisions or administrative amendment provisions. In other irrevocable trusts (not meant for masshealth purposes) it is common to have safeguards in place to allow the trustee or trust protector to make changes to the trust to clarify the donor’s intentions or modify the terms of the trust to meet the donor’s original intentions. Such provisions should not be included in a masshealth trust because it could infringe upon the “any circumstances test.”
Grantor trust provisions - many clients want to enjoy the benefit and/or simplicity of not having to file income tax returns for the irrevocable trust while the donor/grantor is living. It’s also helpful to have grantor trust provisions in place to qualify for the 121 income tax exclusion on the sale of a primary residence if the donor’s house is sold prior to his/her death. In other irrevocable trusts, it is common to use a substitution of assets provision to qualify it as a grantor trust, however, this provision is dangerous for masshealth planning purposes and will likely break the trust. To avoid that uncertainty, you can rely on the right to income provision to qualify for grantor trust status.
Please note: these rules can change at any time so you should be extremely wary of masshealth planning. There are also exceptions that may allow you to accomplish your goals without the use of a masshealth trust. Make sure you speak with a competent Massachusetts estate planning attorney before considering this option. Too many of my clients come to me because they heard a radio ad and are scared/fearful of losing their home. Do not let fear mongers convince you of going down this path. It is only meant for extreme circumstances (and even that stance is arguable).
If you have questions about your own estate planning and are looking for honest, candid advice then give me a call at 781 202 6368 or visit www.PerennialEstatePlanning.com to schedule your free personal consultation.
I’m always happy to help,
Joseph M. Lento, J.D.
Your Local Estate Planning Attorney
Perennial Estate Planning
477 Main Street
Stoneham, MA 02180
Wills & Trusts to Protect Your Family’s Future and Give You Peace of Mind
