Know What a Living Trust Can Do for You (And What it Can’t Do For You)

A living trust, the popular term for a trust that is established during a person’s lifetime and can be revoked or changed at any time, has its advantages.  A living trust can help your heirs by eliminating the expense and time of probate, allow you to consolidate your assets, and avoid the necessity of a guardianship over your estate should you become incompetent, among other benefits.  However, revocable trusts have no tax benefits and can work for or against you if you apply for Medicaid.  Here’s how:

When a person applies for Medicaid benefits, all assets are countable for purposes of determining eligibility, including any assets in a revocable trust.  Current Medicaid eligibility requirements only permit a single individual to have up to $1,500 worth of countable resources to qualify.  (If the individual is married, his spouse will be able to keep additional assets.)  However, some assets, most notably an individual’s residence, are exempt, that is they are not a countable resource.  Here’s the kicker: If your residence is in a revocable trust, rather than simply held in your name, it will not qualify for the residence exemption and will instead be treated as a countable resource.  The following is an example to illustrate.

John Smith is single and applying for nursing home Medicaid.  He has $1,500 in cash and lives in his  home worth $250,000.  John would qualify for Medicaid as he has less than $1,500 worth of assets and his home is exempt.  However, if instead John’s home was being held in a revocable trust then he would not qualify for Medicaid as his home would not be exempt and he would be considered $250,000 over the permitted resource amount.

However, although a revocable trust can hurt a single person’s ability to qualify for Medicaid, it can benefit a married couple. Whereas a single person is only permitted to have $1,500 of countable resources, the spouse of the nursing home Medicaid applicant is permitted to keep half of the couple’s countable resources, up to $109,560.  A revocable trust can be a wonderful way to increase the spouse’s resources as shown in the following example.

John Smith is married and applying for nursing home Medicaid.  He has $50,000 in cash and lives in his own home worth $250,000.  Because the home is exempt, and hence, not a countable resource, John and his wife have $50,000 of countable resources.  John and his wife would be permitted to keep $26,500 (half of $50,000 plus $1,500) and would have to spend down $23,500 of their cash. 

Now, let’s see what the result would have been had John and his wife had their home in a revocable trust prior to John applying for Medicaid. 

The $250,000 home would have been a countable resource, and combined with their $50,000 in cash, John and his wife would have had $300,000 in countable resources.  John and his wife would have been able to keep $111,060 (maximum amount of $109,560 plus $1,500).  Moreover, instead of spending down any of their funds, John and his wife could simply transfer their cash and home into the sole ownership of John’s wife. 

In conclusion, the living trust can be a beneficial instrument for general estate planning as well as Medicaid planning purposes.  The key is having a knowledgeable attorney to help you take advantage of its benefits and avoid its pitfalls.