Before you create an estate plan that includes a Medicaid Planning Trust, discuss the full range of your retirement and health care planning options with a Cape Cod estate planning attorney.

If you will keep reading, you will learn what a Medicaid Planning Trust (sometimes called an Irrevocable Income Only Trust or “IIOT”) is. You will also learn why these trusts are coming under scrutiny and why a Medicaid Planning Trust may not be your best estate planning option.

Additionally, you will learn why it is so important to go over all of your retirement and health care planning options carefully and meticulously with the right Massachusetts estate planning attorney.

What is a Trust?

As you may know, a trust is a binding legal document that allows a third party (a “trustee”) to hold and direct assets in a trust fund on behalf of a beneficiary.

For many individuals, a trust will give you more and better estate planning options than a last will and testament. For example, a trust can shield your assets from taxes and probate, and it can transfer your assets quickly to your heirs after your death.

Whether your trust’s assets are counted when your eligibility for Medicaid is determined will depend on the terms of the trust. If it’s a revocable trust, Medicaid considers assets in that trust to be your property, not the trust’s, so a revocable trust can’t help you with Medicaid eligibility.

How Do Medicaid Planning Trusts Work?

However, with an irrevocable Medicaid Planning Trust, starting five years after you create the trust and complete moving assets into it, Medicaid considers those assets to be the trust’s property, not yours, so the assets are not counted against you when determining eligibility for Medicaid.

A Medicaid Planning Trust can help you maintain eligibility for Medicaid benefits, and upon your death, it distributes your assets quickly to your heirs, avoiding the probate process. For these reasons, over the last few years, Medicaid Planning Trusts have become quite popular.

What many people don’t realize is that the assets that are transferred into a Medicaid Planning Trust are not available to be used for their own needs. What makes a Medicaid Planning Trust (MPT) work is the fact that the assets are not available – to pay for nursing home costs or any other need that the trust maker may have.

The only thing that the person making the trust may receive from an MPT is the income (interest, dividends, rents and royalties) that the assets owned by the MPT may generate. The contributions to the MPT may never be given back to the trust maker, nor may the equity those assets represent be returned to the trust maker.

For example, if the trust maker transfers ownership of a home to an MPT, the trust maker may reserve the right to live in the home, but that is about it. What happens if the trust maker wants to move to an assisted living community?

Most assisted living communities work on one of two models: (1) a rental model, where the individual (or couple) rents an apartment from the company that manages the assisted living community; or (2) a “buy-in” model, where the individual (or couple) buys an apartment from the community – but usually the community must buy the apartment back but often at a discount (something like 80% or 90% of the fair market value).

Either way, the proceeds of the sale of the trust maker’s home will not be available to pay for the move to the assisted living community because the assets of the MPT are not available to be given back to the trust maker. While the home may be sold, the proceeds of the sale may not be used to pay the rent at the assisted living community. Nor may the proceeds be used to buy into the assisted living community in most circumstances because not all of the proceeds will be returned to the trust.

Thus, a Medicaid Planning Trust may not be the best option for you, especially in the aftermath of the COVID-19 pandemic.

Why Are Nursing Homes Currently Under Scrutiny?

The Boston Globe, for example, recently reported that over sixty percent of all COVID-19-related deaths in Massachusetts have occurred in nursing homes. In fact, across the U.S., nursing homes are coming under unprecedented scrutiny for their response to the COVID-19 pandemic.

And that is not the only concern. While many of the nursing home facilities in Massachusetts are professionally staffed and managed, the quality of care may vary significantly. Very often the quality of care in nursing homes that accept Medicaid patients will lag behind that of nursing homes that only accept private pay patients.

Across the U.S., nearly one in three nursing homes have been cited for violations, according to the National Center on Elder Abuse. About one in ten nursing homes have been cited for violations that caused serious injury or harm to a nursing home’s elderly residents.

What Are the Disadvantages of a Medicaid Planning Trust?

The main problem with a Medicaid Planning Trust is its inflexibility. As an irrevocable trust, a Medicaid Planning Trust may not include any provision for amending the trust or any ability for you to “trade” assets with your trust.

While the assets in a Medicaid Planning Trust are not counted toward Medicaid eligibility after a five-year look-back period has passed, those assets are unavailable for use for most home care or assisted living care, the health care that most people will need before needing nursing home care.

A Medicaid Planning Trust may only make practical sense if you have been diagnosed with a condition that will absolutely require you to reside in and receive care in a nursing home facility (for example, Alzheimer’s Disease, Dementia, Multiple Sclerosis or Parkinson’s Disease).

Moreover, before you set up a Medicaid Planning Trust, you must understand the limits that the trust will place on you and your spouse. If you are the first one to die, the assets in your Medicaid Planning Trust will not be available to your spouse, often resulting in a surviving spouse living in an impoverished condition.

Compare and Consider

Consider that the average cost of nursing home care in Massachusetts is, as of 2021, approximately $130,000 to $150,000 per year. The average length of a nursing home residency is approximately two years, so the total average cost of a nursing home is approximately $300,000.

Compare that figure to the total value of your estate – your real estate holdings, investments, bank and retirement accounts, life insurance, etc. Does it make sense to give away everything you own, so that the only thing you get to keep is the income those assets can generate, to save $300,000? If your estate is worth over $750,000 such a decision may not make a lot of sense.

Keep in mind, if there is a “back door” to your trust that somehow allows the assets you transfer to the trust to be returned to you, MassHealth will take the position that the assets in the trust should be counted when your eligibility for Medicaid is determined.

Does it really make sense to transfer the total value of your estate into your trust, making most of your assets forever unavailable for the needs of you and your spouse, to save approximately $300,000?

What Are Your Options?

Every trust is different. If you currently have a Medicaid Planning Trust, and if you would like to find out whether or not you or your spouse can have access to the assets in that trust, schedule a consultation with a trusted Cape Cod estate planning lawyer.

We have reviewed many MPTs that have a “back-door.” The problem is those trusts will likely not work when the time comes. We have also found that many families don’t understand what they have done and the consequences that their MPT will force upon them, and consequently want to “bust” their Medicaid Planning Trust.

The truth is most Medicaid Planning Trusts have a hidden “back-door.” This unnoticed escape hatch can save families from an MPT they did not understand when they set it up. It can give access to assets so that assisted living or in-home care may be permitted options that their MPT took off the table.

No one knows what tomorrow may bring, so if you have not yet started planning your estate and your future, this is the time to begin. A Medicaid Planning Trust can be a wonderful tool in the right circumstance. But for many families Medicaid Planning Trusts have been used as a “one-size-fits-all” approach replacement to an appropriate estate plan that fits the unique needs of the particular client. A Massachusetts estate planning lawyer can explain all of your options and walk you through the entire estate planning process from start to finish.

How Can the Right Estate Planning Attorney Help You?

Your estate planning attorney will suggest estate planning options that are right for you. If you have substantial assets or real estate holdings, a properly drafted and properly funded trust can ensure that your assets will be available for your health care needs.

However, you must work with a Cape Cod estate planning attorney who understands the details of Medicaid, MassHealth, and Medicaid Planning Trusts in Massachusetts. The right attorney can draft a trust that is customized for your needs and your family’s needs.

An effective estate plan is important for everyone. The right estate planning attorney can address all of your estate planning concerns and will provide the guidance and legal services that create the best possible estate plan for you and your family.