Book a consultation
QUESTIONS?
Send us a message
CALL US TOLL-FREE:
1.844.445.3422
Nurse attending to an elderly woman patient

How revocable living trusts fall short for long-term care

by Kelly Gicale | Contributor
June 26, 2022

A revocable living trust is known to be one of the most commonly used estate planning vehicles. Only second to the last will and testament, this kind of trust is a useful option for many people because of its numerous benefits. A revocable living trust can allow you to avoid probate, exert greater control over the timing of distributions to your heirs and put safeguards in place to preserve your assets for your loved ones after your lifetime.

However, a revocable living trust is not always the best choice for everyone. This is especially true when long-term care is needed and you must qualify for Medicaid to cover the enormous costs associated with such care.

When you or your spouse requires long-term care at a skilled nursing facility, the expense of what is often an unknown period of time can be astronomical. As a result, many people need to rely on Medicaid to ensure that the costs will be covered.

Medicaid is a government assistance program that provides medical coverage for people who qualify based on financial need. To receive coverage, applicants cannot have assets or income greater than a certain legal threshold.

While planning can be undertaken to protect assets from a “Medicaid spend down,” where a person dissipates their assets and funds to meet that threshold and receive Medicaid coverage, a revocable living trust is not an effective option in this regard. Because with a revocable living trust the person who created it (who often also serves as its trustee) continues to have control over its assets, the government views this as being fair game to be included when determining if they do, in fact, meet the financial need requirement.

While this is the main problem with using a revocable living trust when you need to receive Medicaid coverage for long-term care, there are other nuanced issues to be aware of if you have one of these trusts in place and worry about needing this kind of care in the future.

In this article, you can learn the specifics of how a revocable living trust may work against you should you or your spouse need long-term care in the future. You'll also get to know the rules that may apply in your case and could prevent you from receiving necessary Medicaid support for the huge costs of that care.

You will also discover the circumstances in which a revocable living trust can be used while still maintaining eligibility for valuable Medicaid assistance. While this may not be available to everyone, it could apply to your situation, enabling you to continue to use a revocable living trust for the benefits mentioned above while also receiving government support to pay the exorbitant costs of your or your spouse's long-term care.

Assets in a revocable living trust can count against you

As mentioned, the main issue with a revocable living trust and Medicaid coverage for long-term care is that the assets held in this kind of trust are included and counted against you for determining eligibility.

While this applies to all assets held in trust, the most problematic asset is often a person's home. This is because for most people, their home is their most valuable asset. Normally, your primary residence is considered exempt when determining if you qualify for Medicaid coverage. This means that as long as the equity in your home isn't greater than a certain value ($636,000 in 2022), it will not be counted in your total asset value when you apply for Medicaid. When you place it in a revocable living trust, however, it will count as a resource that likely will disqualify you from receiving Medicaid coverage.

For this reason, if you anticipate needing Medicaid to pay for long-term care, a revocable living trust may not be the best option for you to implement.

Assets must be transferred to community spouse

When you are married and have a joint revocable living trust, the situation can become even more complicated, especially when one spouse needs long-term care while the other remains at home.

Medicaid laws generally dictate that all assets in excess of $2,000 must be transferred to the healthy spouse living in the community within one year of the spouse needing long-term care being placed in a facility. This is to ensure that the spouse receiving long-term care can qualify for Medicaid coverage, as their assets must be $2,000 or less. It depends on the state in which you live, but in general, the community spouse may keep one-half of your total countable assets up to a maximum of $137,400 (in 2022). It's relatively simple to complete this requirement for assets that aren't held in a trust, as funds can be transferred into accounts solely owned by the spouse who is living at home and does not need Medicaid coverage. Non-exempt assets can also be deeded or titled solely in the name of the community spouse to meet this requirement.

The problem with this requirement and a revocable living trust is that it's very likely that the assets held in your trust will be greater than $2,000, and transfers for a joint revocable trust aren't possible in states like Texas. This means that if you live in Texas or another state with similar laws, the assets in a joint revocable trust could prevent you or your spouse from receiving Medicaid support for long-term care.

Other planning solutions may also be unavailable

Similarly, your state's laws may also make other common Medicaid planning tools unavailable when your assets are held in a revocable living trust.

For example, a common option that your attorney may recommend for ensuring your spouse can receive Medicaid coverage for long-term care in the future is setting up a special needs trust through your estate. When your assets pass to your spouse through a special needs trust, the assets held in that trust are excluded for Medicaid eligibility purposes. As a result, many people choose to use this kind of trust to preserve and protect their wealth for the benefit of their surviving spouse. In this way, those funds can be used to supplement and enhance their spouse's quality of life while they receive valuable Medicaid benefits to pay for their care.

The issue with a revocable living trust is that in states like Texas, a special needs trust created for the benefit of a surviving spouse can only be made through the deceased spouse's will – not through a trust. So, your estate plan will need to be configured to ensure that the assets you wish to be used to fund the special needs trust aren't held in your revocable living trust. Your will then also needs to be crafted to include a provision creating this kind of trust for your surviving spouse's benefit to ensure that they can still qualify for Medicaid coverage should they need it for long-term care.

It's well established that you cannot create a special needs trust for a surviving spouse who is on Medicaid from a revocable living trust. While contingent special needs trusts can be created for the benefit of children and others as a way to protect assets and prevent them from being counted in determining eligibility for government assistance, they are specifically not allowed in this situation.

For this reason, a revocable living trust may work against you when you're trying to plan ahead and ensure your spouse can receive Medicaid for their long-term care needs after your lifetime.

When a revocable living trust can be used

There are circumstances when you can use a revocable living trust and still qualify for Medicaid coverage for long-term care. The requirements of this are very specific and depend on having your plans airtight; as a result, it's imperative that you work with an experienced estate planning attorney to ensure that everything is arranged properly.

To be effective, you or your spouse (whoever is the Medicaid applicant) will need to use either a Lady Bird deed or a transfer-on-death deed. A Lady Bird deed is a specific kind of deed available in Florida, Michigan and Texas. It allows you to name the person or entity who will receive a piece of property after your lifetime without having the home or land go through probate. It's an inexpensive way to pass on property without having it be subject to probate, as it would be if included in a will. Similarly, a transfer-on-death deed allows you to name the beneficiary, or who will receive the property, after your lifetime. Your beneficiary will then receive the parcel or real estate immediately upon death without having to wait for probate to be completed. These two options essentially accomplish the same goal; it simply depends on where your property is located as to which one will apply in your case. For example, as Florida does not recognize transfer-on-death deeds, you will need a Lady Bird deed if your home is in Florida. Otherwise, you likely will need to use a transfer-on-death deed.

With both of these options, the benefit is that property transferred outside of probate in this way cannot be recovered through a Medicaid estate claim. In essence, when someone has benefitted from Medicaid coverage for long-term care, the government generally has the right to claim the amount spent on their care from that person's estate after they have passed. When that person's home transfers to a beneficiary through a transfer-on-death deed or Lady Bird deed, however, this option is not available. This means that the property can be protected from this kind of claim.

In the context of a revocable living trust, this can be used to your advantage by naming the trustee of your trust as the beneficiary on one of these deeds. This is because when the following situation applies to you, this kind of arrangement can help you to maintain Medicaid eligibility while using a revocable living trust to preserve your assets for the future.

You may be able to remain eligible for Medicaid coverage when you use a transfer-on-death deed or Lady Bird deed to name the trustee of a revocable living trust as the beneficiary and the following circumstances applies to you:

  1. There are multiple beneficiaries who cannot come to an agreement on selling, renting or mortgaging your home, so one trustee can make the final determination.
  2. Protection is necessary for a disabled beneficiary by having a special needs trust created within the trust for their benefit.

Protection is necessary for a beneficiary who is:

  • A minor (under 18 or 21 depending on your state)
  • A spendthrift (has trouble managing money)
  • Having or could have marital issues
  • Likely to be sued or is already subject to a lawsuit
  • Has a substance abuse problem

If all of these requirements apply to you, then you may be able to use a revocable living trust and still apply for Medicaid coverage for long-term care.

However, other than this specific exception, revocable living trusts are often not useful in Medicaid planning.

Illustrative example

The example below illustrates how revocable living trusts can affect your planning for Medicaid coverage in the future.

Amy and Russ are a married couple in their 70s. They live in Dallas, Texas, where they retired after long careers serving as teachers. They have two children who have all moved out of state after college, and they do not have any other close family members who live nearby.

Five years ago, when they were preparing to retire, Amy and Russ asked their friend, Dave, to help them with estate planning. Dave is a general practice attorney who sometimes drafts planning documents like wills and trusts for friends and a few clients who he already represents in other matters. Although estate planning isn't his specialty, Dave offered to help his friends free of charge because of the help Amy and Russ have given to Dave and his family over the years.

Health - Woman that has fallen in the bathroom

Because Dave thought that it would be best for Amy and Russ to create a plan that helps them to avoid probate, he recommended a joint revocable living trust as their central estate planning document. After drafting and executing the trust instrument, he took steps with Amy and Russ to retitle their home and all of their valuable assets in the name of the trust. They decided that Dave would serve as trustee of the trust and Amy would be named as successor trustee, or the person who will immediately have control of the trust assets if Dave were to become incapacitated or pass away. Like most couples, they expected that Amy would likely live longer than Dave, so this arrangement made the most sense to them.

Several years later, Amy was bringing laundry up to their second floor when she slipped and fell down a full flight of stairs. The accident left her disabled, and she could no longer care for herself or handle day-to-day hygiene and other usual tasks. Amy also needed to have several expensive surgeries and had to spend months in a rehabilitation center before she could return to their home. Back at home, Russ tried to care for her, but soon they both realized that it would be too overwhelming, if not impossible, for him to provide for all of her medical and other needs.

Russ looked into home health care, but the costs for a medical professional were prohibitively high, and the kind of help they could afford would not be able to provide the specialized care Amy needed. He also investigated assisted living facilities in their area that they could afford, but he soon discovered that those, too, were ill-equipped to provide the medical support he knew his wife would require.

Understanding that a skilled nursing facility was the best option for Amy, Russ made inquiries around town and found a few options that would work well. However, all three of the choices cost more per month than the Social Security and retirement income he and Amy were receiving.

The representatives at one of the facilities asked Russ about Medicaid and mentioned that they accept this coverage if Amy had it in place. Russ came to understand that Medicaid would pay the full monthly cost for her to stay in the facility if her application were accepted.

Russ then reached out to Dave to see if he might be able to help with Amy's Medicaid application. Dave was happy to help, but he knew that Russ and Amy wouldn't qualify based on the value of their home and other assets. He explained to Russ that they would need to reduce Amy's assets to $2,000 or less in order for her to be eligible for Medicaid coverage. Though Dave was no Medicaid expert, he had heard that there is a 60-month (or five-year) look-back period that meant wealth transfers made for the purpose of gaining Medicaid coverage generally needed to be made at least five years before applying. Without specialized expertise, however, he wasn't sure what to tell Russ.

Russ then sought out help from an attorney who was experienced in estate planning and Medicaid. In the first meeting, Russ learned that unfortunately all of the assets held in their joint revocable trust would be counted against Amy and cause her to be ineligible for coverage. He also said that because they live in Texas, state law makes it impossible for them to transfer assets from the joint trust into Russ' name to help Amy meet the $2,000 asset limit requirement. He also explained that while Dave was right that there is normally a five-year look-back period, in a case like theirs where Russ is planning to live in their home while Amy is in the facility, they could have made the transfers at the time of Amy's application so that Russ could keep their assets.

As a result of the incomplete planning provided by Dave, who simply doesn't have expertise in estate planning and Medicaid, Russ and Amy were forced to spend their hard-earned wealth to pay for Amy's skilled nursing care. They both are concerned about the future and what will happen once Russ needs extra assistance, too. Eventually they will meet that $2,000 asset limit requirement, but it will mean that they have little supplemental support and will not be able to leave anything behind for their children.

The story of Russ and Amy didn't have to end this way, however. If they had worked with an experienced Legacy Plan Network Attorney to create a plan that took into account the potential need for Medicaid in the future, then they could have preserved their wealth, received full coverage for Amy's long-term care, and left a legacy behind for their children and grandchildren.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
25 common estate planning mistakes booklet

Don't make estate planning mistakes. Avoid common mistakes with our free guide,
"25 Common Estate Planning Mistakes"



Legacy Assurance Plan Shield Logo
Subscribe to Our Monthly Newsletter!

We won't share your email, and we make it easy to unsubscribe!