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Medicaid’s Confusing Treatment of Trusts (Part 2)

                Last week I wrote about trusts and how they are treated by Medicaid.  Specifically, I am talking about irrevocable trusts.  Most people assume that if they have placed their assets in an irrevocable trust, that by itself is enough to protect the assets from having to be spent down before achieving Medicaid eligibility.

                Unfortunately, it’s more complicated than that.  We must look to the terms of the trust.  What portion, if any, of the trust assets can be paid to the Medicaid applicant?  In other words, are there any circumstances under which the Medicaid applicant, as a beneficiary of the trust, can receive payments from the trust?  Whatever can be received is counted as an asset under Medicaid resource (asset) rules.  This is the case regardless whether he/she actually received the asset.  A trust that permits – but does not require – the trustee to distribute trust assets to a beneficiary counts as an asset under Medicaid’s rules.

                As I explained last week the Medicaid program consists of federal and state laws and regulations.  Each state is charged with administering its own Medicaid programs.  It is free to implement its own laws and regulations as long as they don’t violate the federal laws that apply.  In practice, however, states often try to “stretch” their interpretation of federal Medicaid laws.  It is up to advocates such as elder law attorneys to challenge the states when they have gone too far.

                For many years some states have looked disapprovingly upon the use of trusts even though federal law is clear that they are permitted.  Massachusetts in particular has been a battleground of sorts in this area.  After the last major changes to the Medicaid laws in 2005 that imposed a 5 year Medicaid lookback for transfers to individuals or to trusts, Massachusetts categorically denied Medicaid applications where any irrevocable trust was established.  A typical case in which a Medicaid applicant had transferred a home to a trust more than 5 years before making the application should have not been an issue. Yet, Massachusetts routinely denied these applications.

                The state’s position resulted in appeals and ultimately litigation in state court.  Next week I’ll tell you how that turned out.