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In the world of long-term care Medicaid, a nursing home patient can get assistance if they meet certain basic eligibility requirements. One of the most confusing requirements is the income limit.

In essence every state imposes an income limit. In the majority of the states, the basic premise is that the nursing home patient doesn’t have enough monthly income to cover the cost of care. If you have enough income each month to pay the nursing home, you don’t need or qualify for assistance. If you don’t and you meet all the other eligibility requirements (i.e., your assets are spent down below the state reserve limit) then you can get help.

There are a certain number of states that use an income limit much lower than the cost of care. These are known as “income cap” states. In an income cap state, if the applicant’s income exceeds the state income limit for Medicaid, they are automatically disqualified and cannot get Medicaid to help pay for their long-term care expenses, even if they are completely broke and do not have enough income to cover those expenses directly.

The state income cap is set at 300% of the federal poverty income. For 2018 this amount is $2,250. In every state with an income cap, the cost of a nursing home is more than double (and in most cases more than triple) the state income cap.

Many seniors have incomes that exceed the income cap, but do not have enough income to cover the cost of a nursing home once they have depleted all other resources. Fortunately, there is a way to beat the Medicaid income cap!

Federal laws on the creation of trusts under Medicaid allow for defeating the income cap for everyone and here is how it’s done.

There is a special type of trust formally called a “Qualified Income Trust.” Most states do not use that term. Instead it is known as either and “Income Cap Trust” or a “Miller Trust.” The later name as a result of a court case in Colorado (Miller v. Ibarra) that established the right of Medicaid applicants to use the trust as a way to overcome the limitations imposed by a state income cap when faced with the high cost of long-term care.

The biggest problem with the Income Cap Trust is that most people don’t know they exist or how they are used. This was highlighted recently when I received a question from someone who asked what other help they could get with nursing home expenses since they didn’t qualify for Medicaid because their income was too high. They had never heard of an income cap trust. Once they learned about what it was, they wished that they had learned about it when the couple had spent down enough to be asset-eligible for Medicaid.

How the income cap trust works, depends on the state in which you use it. All follow a basic format for their trusts and nearly all states provide a template form for Medicaid applicants to use to create the trust. They are typically 3 or 4 pages in length. Once the trust is executed, the trustee of the trust creates a trust checking account where funds can be deposited. Whoever is in charge of the patient’s finances either takes income from the patient’s regular checking account and deposits it into the trust or arranges to have the source of income (i.e., Social Security check, pension, etc.) directly deposited into the income cap trust.

In most states, you must only put the amount of income that exceeds the income cap into the trust. For example, if the Medicaid applicant has $2,750 a month in income, they would need to contribute the difference between the income cap and the monthly income to the trust. After the applicant deposits $500 into the trust, the applicant is considered “income eligible” for Medicaid. Alternately, in a state like Arkansas, they require that all of the applicant’s income be placed into the trust.

Ultimately, the funds in the trust are spent on the patient’s monthly share of cost or diverted to the patient’s spouse as part of the family allowance, the same as in non-income cap trust states. While it’s more work to achieve Medicaid eligibility, the good news is that the income cap is truly nothing more than a harmless scarecrow only meant to make you think you can’t get help when you really can.

If you want to be a savvy advisor, consider learning the subject of Medicaid Planning trough our upcoming Continuing Legal Education course. For more information, click here.