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Long-term care planning is an essential, but easily overlooked, component of effective estate planning. As the National Institute on Aging (NIA) points out, many individuals have deep concerns about their potential need for long-term care, but relatively limited tools with which to prepare for that eventuality. Many senior citizens transition from private insurance to Medicare coverage for health care as they enter their retirement years – but while Medicare offers robust coverage for a number of medical scenarios, the program does not typically cover the costs of long-term care. The long-term care planning available through private insurance policies is often spotty, and yet paying out of pocket can rapidly drain an entire lifetime of savings. For all these reasons, many individuals consider creating and funding Medicaid trusts to facilitate long-term care coverage as part of your overall estate plan. There are both state Medicaid eligibility requirements and factors dependent on individual circumstances to consider in setting up this type of trust, so speaking with an attorney in your area who can help you evaluate your options can often be a good idea.
A Medicaid trust is a type of irrevocable trust specifically designed to preserve the primary beneficiary’s eligibility for Medicaid benefits. Typically a Medicaid trust is formed as part of a cohesive long-term care planning strategy, developed to ensure that the individual preparing his or her estate plan will have access to reliable health care, if needed, as they grow older – even if the care needs are substantial and needed over an extended period of time.
Medicaid trusts are similar to a few other types of trusts, such as special needs trusts, in that a Medicaid trust is intended to make sure that its primary beneficiary will be eligible for “needs-based” or “means-tested” services – that is, those that are usually available only to individuals or households whose resources (variously defined, depending on the program) fall below a certain threshold. Unlike a special needs trust, however, a Medicaid trust is usually funded by the same person meant to benefit from the arrangement. Medicaid trusts also differ from most other types of trusts in that the assets remaining in the trust at the time of the primary beneficiary’s death are usually owed to Medicaid, up to the total cost of the Medicaid benefits the individual received during his or her lifetime.
Medicaid is administered as a joint state-federal program, with many of the qualification requirements set by the separate states, whose respective departments also carry out much of the administrative workload involved in overseeing the program. This joint structure is meant to ensure that the individual states maintain the autonomy and flexibility to determine how best to meet the needs of their residents, while at the same time minimizing the administrative burden on the federal government. As a general rule, individuals considering where and how Medicaid eligibility should fit within their estate plans will likely want to begin with the resources available in their states, as these will often point back to the federal guidelines as needed, while the reverse is not always the case.
The “look back” period (also sometimes written without a space, as the “lookback” period) is a period of time a government agency will “look back” over an individual’s financial history for signs that the person has attempted to circumvent the means-testing requirement by such strategies as giving substantial assets to friends or family, or selling property for significantly less than its fair market value, in order to appear more “needy” than is actually the case. The lookback period can vary by state, but in Ohio is set at five years or 60 months from the date of the individual’s Medicaid application. Any transactions within those five years prior to the initial application that raise a suspicion of means-testing evasion may be used to disqualify the applicant from Medicaid benefits.
To function as intended within an Ohio estate plan, a Medicaid trust must have been formed at least five years before the initial application for benefits. Trusts formed more recently can be treated as attempts to circumvent the eligibility requirements, and may lead to a denial of Medicaid benefits. Since a Medicaid trust is by its nature irrevocable, having an application for health care coverage denied after placing assets out of reach in a Medicaid trust can leave the individual denied benefits in an extremely precarious situation – medically, financially, and personally. Consequently it is recommended to start “early” in your Ohio long-term care planning, and work with an attorney to put any plans for a Medicaid trust in place well in advance of when you might expect to need the program’s long-term care coverage.
The Ohio Administrative Code outlines specific rules regarding the creation of trusts for the purposes of securing eligibility for Medicaid (as well as other similar programs) under Rule 5160:1-3-05.2, while the Ohio Department of Medicaid (ODM) provides a template that residents can use to create a Qualifying Income Trust (QIT), so preparing the officially vetted form in accordance with the terms set out in the Administrative Code will likely offer most people a strong start. However, the ODM form does not address such considerations as the selection of a trustee who will be responsible for ensuring that the trust’s benefits are disbursed promptly and for the specified purposes throughout the primary beneficiary’s lifetime, so you may still want to review the practicalities of trust fund setup with an Ohio estate attorney before you commit substantial resources, and your hopes for an effective long-term care planning strategy, to a one-size-fits-all template.
The ODM form meets Medicaid trust requirements partly by its specification that any funds remaining in the trust upon the primary beneficiary’s death will be used to reimburse Medicaid for expenses related to the individual’s care. Beyond this nod to Medicaid’s fiscal responsibility, however, the document is subject to the same basic rules for execution and validation as any other trust. In Ohio these rules tend to be relatively “grantor-friendly” in that state laws impose relatively little in the way of required administrative paperwork and even offer, under O.R.C. § 5817.10, an option for grantors to submit their trust instruments to an Ohio Probate Court to have the trust’s legal validity confirmed and recorded. Note, however, that because a Medicaid trust is inherently irrevocable the relative ease of execution in Ohio means that prospective grantors bear a special onus to ensure that the document’s terms and the trust’s funding meet the appropriate balance between present needs and future care.
As important as they can be for long-term care planning, Medicaid trusts do entail a number of disadvantages that can sometimes lead individuals to hesitate over incorporating Medicaid trusts into their estate plans. These disadvantages can be understood in two main categories: those that apply to all irrevocable trusts and those that are specific to the requirements that help to ensure the primary beneficiary’s eligibility for Medicaid’s long-term care coverage.
The disadvantages of irrevocable trusts are generally tied to their inflexibility. These trusts, by being outside the grantor’s ability to alter once formed, are commonly used in asset protection strategies, as assets an individual cannot access at will are typically not “counted against” him or her for the purposes of determining the individual’s liability for certain types of taxes – or eligibility for specific needs-based programs, such as Medicaid. However, this essential feature of an irrevocable trust can also become a substantial drawback, as the assets will remain out of reach even if the grantor’s circumstances change and additional resources are needed quickly. An Ohio estate planning attorney with Rhodium Law may be able to help you weigh the risks and benefits of an irrevocable trust based on your unique situation.
The major disadvantage of a Medicaid trust that is not shared by most other types of irrevocable trusts is that a Medicaid trust executed as a QIT under the guidelines set out by the ODM and in Ohio’s Administrative Code will require any assets remaining in the trust at the time of the primary beneficiary’s death to be used first to reimburse Medicaid for all expenses Medicaid has covered on the individual’s behalf. If there are assets remaining after Medicaid has been fully repaid, then the trustee may distribute those assets to the primary beneficiary’s heirs. This “if,” when it applies, is often considered one of the principal advantages of a Medicaid trust, in that coverage obtained through Medicaid may sometimes be cheaper than that paid for out of pocket or through private insurance and thus may leave more assets to distribute to an individual’s loved ones – but the costs of long-term care are highly contingent upon multiple circumstances that can be hard to foresee, and there is no guarantee that after Medicaid is repaid there will be any assets left to distribute at all.
One other potential detraction of a Medicaid trust is that it necessarily functions by limiting the primary beneficiary’s access to resources. Under the framework for a QIT set out by the ODM, income must be paid into, and withdrawn from, the trust on a monthly schedule. The grantor (who is also often, but not obligatorily, the trust’s primary beneficiary) will need to work closely with the trustee and may also wish to consult with an estate planning attorney in order to ensure that the amounts available on monthly rotation will be sufficient to cover the individual’s daily living expenses during long-term care scenarios, while also remaining low enough to maintain Medicaid eligibility – a balance that is crucial to achieve, but can be difficult to accurately estimate.
Medicaid trusts can offer a number of advantages for long-term care planning, but they are not without financial and practical risks. If you are considering the formation of a Medicaid trust or an Ohio Qualifying Income Trust as part of long-term care planning for yourself or a loved one, you may benefit from discussing your individual circumstances and long-term care planning concerns with an estate planning attorney.
A consultation with Rhodium Law may help you determine whether a Medicaid trust makes sense in your situation, as well as assisting you as you evaluate the balance between protecting assets for the future and making sure you have enough available for your near-term use. Call our Cleveland office at (216) 699-8145 today to set up a conversation to discuss your needs.
