Warning: Recent News that a Trust will not Work for Medicaid Asset Protection Planning is Greatly Exaggerated

By Paul T. Czepiga

iStock_000018407934SmallEarlier this month (the decision will be officially released on June 17th) the Connecticut Supreme Court decided the case of Palomba-Bourke v. Commissioner of Social Services. Based on that case, the press is now reporting that  Connecticut officials can reject Medicaid coverage for nursing home patients if their spouses have trust funds, regardless if the trust predated the marriage and regardless of whether the funds were never intended to benefit the patient.

Sounds bad, you might think.

Here are the facts:

  • A wife is the beneficiary of a trust created by her first husband when he  died in 1976.
  • She since remarried and her second husband is applying for Medicaid benefits.
  • The trust had $514,977 in it at the time of the Medicaid application.
  • The  trust required the trustee to pay to, or expend for the benefit of, the wife and the children of the first marriage so much of the annual net income and principal of the trust as the trustee deemed advisable for their comfortable care, maintenance and support and for the education of the children.

Because the trust uses language such as “support,” it is clear that the assets of the trust, under Medicaid rules and Connecticut law as it stands today, are, in fact available to support the wife and, for Medicaid purposes, the $514,977 counts an as asset of hers, making her husband ineligible for Medicaid.

The only question was whether the rules that existed in 1976 would apply to the trust. If so, the trust would not make her husband ineligible for Medicaid.  The Supreme Court upheld the trial court and stated that the Medicaid rules that exist at the time of application apply to the trust, not the rules when the trust was created.

Fear not. This case is nothing new.

What does work, for Medicaid eligibility purposes, is a fully discretionary trust where the trustee has discretion to either make money fully available to the beneficiary or to fully withhold distributions from the trust beneficiary, or anything in between.

For example, if a husband dies and leaves a trust behind for his wife that states, as did the trust in the  Palomba-Bourke case, that the trustee can use the trust for the wife’s care, maintenance and support, then if the wife enters a nursing home or if her new husband enters a nursing home, the assets in the trust are treated no differently than if the assets were in the wife’s pocket—the trust funds are an available asset.

If, however, the trust is a fully discretionary trust, then if either the wife or her new husband enter a nursing home, the trust assets are ignored by the state’s Medicaid agency.

The Palomba-Bourke trust was a trust established for inheritance tax avoidance purposes at a time when the inheritance tax rules, state and federal, were much more onerous. It was never intended to be a trust with any Medicaid planning ramifications.

In sum, if you want to use a trust for a spouse that will not cause any Medicaid problems, use a discretionary trust, but remember, when it comes to Medicaid planning, there are many ways to skin a cat and maybe you shouldn’t use a trust at all, but embark on a different strategy based on your own unique circumstances.

Confused? Give us a call – we’d be happy to take you through the options that would be right for you.

Related Posts:

Webinar: Understanding and Preparing for Long-Term Care Costs
Revocable vs. Irrevocable Trusts: What’s the Difference?
Will Trust Assets Be Considered When Applying for Medicaid?
Be Careful: Transferring Assets to Qualify for Medicaid in Connecticut May Backfire
How to Apply for Medicaid (Hint: You’ll Need Big Binder Clips)
What Assets Belong in a Trust?

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