By: Mike Anthony, JD | email: [email protected]         

          Most people do not know how the revocable living trust interplays with Medicaid rules for long-term care medical assistance eligibility. The living trust can cause major problems.  Every advisor who recommends a trust or does estate planning should understand how the living trust affects the Medicaid spenddown.

          We all love Revocable Living Trusts (RLT), right? Advisors of all kinds (attorneys, financial planners, insurance agents, CPAs) think living trusts are the nearest thing to a cure-all elixir that has ever been created.  RLTs can bypass probate, hold assets back for spendthrift children, and even double the amount a married couple could pass estate tax free. What’s not to love?

          While most advisors don’t know what they need to about Medicaid planning (if you are one of those, please go to www.medicaidplanning.org to learn more), those with even a basic understanding of Medicaid planning know that a client’s home (if the value is less than $500,000) is an exempt asset when it comes to qualifying for Medicaid.

          So what’s the problem with RLTs from a Medicaid planning perspective? First, you have to understand the goal of Medicaid planning. That goal is to re-title/re-position a client’s assets in to “exempt” assets that do not count against the client when it comes to the spenddown.

          As a general rule of thumb, single clients have to spend down all of their “countable” assets to $2,000 in order to qualify for Medicaid assistance for nursing home care.

          What if the client does proper planning but leaves the home in a RLT before applying for Medicaid? The house which would normally be an exempt asset if not owned by a trust then becomes a countable asset and the client will NOT qualify for Medicaid.

          Example: Assume a client has a house in an RLT and then spends down all her other assets to $2,000 (therefore, she thinks she will qualify for Medicaid when she applies). She applies for Medicaid in December hoping to get Medicaid benefits backdated to December 1. In late January the Medicaid agency finds out that her house is owned by a RLT. Instead of being approved for Medicaid with payment going back to the time of application, she receives notice in early February that she has too many resources and is denied approval because her home is a countable asset.

          The client quickly removes the home from the RLT and reapplies for Medicaid before the end of February. Because of this screw up Medicaid will only be approved back to February 1. This cost the client a $6,000 bill for December and a $6,000 bill for January.  This financial punishment could have been avoided if she or her team of advisors (attorney, financial planner, etc.) knew proper Medicaid planning.

          Should you learn proper Medicaid planning? If you are giving advice to clients 55 and older who have less than $1.5 million in assets you should definitely learn Medicaid planning. Why? So you can give the best advice to your clients, avoid lawsuits for non-Medicaid compliant advice, and grow your business and earn more money. There are 7,000 people turning 65 every day in this country. That screams opportunity for those who are willing and ready to learn this important subject matter.