There are generally two types of Medicaid: Home care (or Community) Medicaid and nursing home (or Institutional) Medicaid. To qualify for either type of Medicaid, in New York (in 2016), an individual cannot have more than $14,850 in non-exempt assets. Exempt assets generally include, among other things, your home (provided that the equity in your home is less than $828,000) and your retirement accounts (provided that your retirement accounts are in “payout status”). Any asset that is not exempt is called an exposed asset or otherwise called a non-exempt asset or an available resource for Medicaid purposes.

Imagine the following scenario: Applicant owns a home worth about $700,000. He also has an IRA worth approximately $500,000. Applicant is currently withdrawing his Required Minimum Distributions (RMDs) from the IRA. Applicant also has a checking account with approximately $10,000 in it. Applicant’s monthly income includes his Social Security Retirement income of $1,260, pension income of $1,800, and a small other pension of $800.

Because the equity in the Applicant’s home is less than the $828,000 threshold, his home is not counted as an available resource for Medicaid purposes. Because the Applicant’s IRA is in payout status (i.e., he is withdrawing his RMDs), the IRA is not counted as an available resource for Medicaid purposes. And, finally, because the Applicant’s checking account is less $14,850, the checking account is not counted as an available resource for Medicaid purposes. This means that the Applicant is qualified for home care Medicaid.

Imagine the following modification to the above scenario: In addition to the above, the Applicant also has a $250,000 brokerage account. The home is still not counted as an available resource. Nor is the IRA or the checking account. But, the $250,000 account at UBS is not an exempt asset. In fact, it is an exposed asset and will be counted as an available resource for Medicaid purposes. What should the Applicant do if he wants to qualify for home care Medicaid?

In New York, there is no penalty period or look-back period for home care Medicaid. That’s not true for nursing home Medicaid, but that’s for a different discussion. One thing that the Applicant could do to qualify for home care Medicaid would be to create a Medicaid Irrevocable Income-Only Trust and transfer the $250,000 brokerage account into the Trust (or, some say re-title the $250,000 brokerage account into the name of the Trust).

The Applicant is the grantor (a/k/a creator) of the Medicaid Irrevocable Income-Only Trust and someone the Applicant appoints (e.g., child or children) is the Trustee (a/k/a manager). The Trust agreement provides that the Applicant gets all of the net income from the Trust, but he cannot get any of the principal from the Trust. By preventing the Applicant’s access to the principal of the Trust, we prevent Medicaid’s access to the principal of the Trust. And, since income does not disqualify anyone from Medicaid, it is safe to pay the income from the Trust to the Applicant.

And, what, you may be asking, is the income from the Trust? Income from the Trust depends on what the Trust assets are invested in. In this case, the Trust asset is a $250,000 brokerage account. In that account may be stocks, bonds, some cash, etc. So, income from the brokerage account would be dividends, interest on the bonds, interest on the cash account – in other words, whatever type of income one would normally earn on an investment account. All of that income would be paid from the Trust to the Applicant – monthly, quarterly, semi-annually, however often the Applicant wants it.

You may be also asking: what happens if the Applicant needs more than just the income from the Trust? What happens if the Applicant needs some of the principal from the Trust? Just because we said above that paying principal from the Trust to the Applicant makes that principal available to Medicaid (which it does), it is not impossible to get some portion of the principal back to the Applicant. This is where the Trustee(s) and Beneficiary(ies) come into play.

A Medicaid Irrevocable Income-Only Trust agreement generally provides that, although the Trustees cannot pay principal to the Applicant, the Trustees may pay principal to the Beneficiary(ies). Imagine the following further modification to the above scenario: In addition to the above, we know that the Trustees of the Trust are the Applicant’s two children. We likewise know that the Applicant’s two children are also the Beneficiaries of the Trust. In addition to paying the Applicant the net income from the Trust, the Trust agreement also allows the Trustees to pay to the Beneficiaries any portion they want of the principal of the Trust. This means that the Applicant’s children, as Trustees, can pay a portion (or all) of the Trust principal to themselves, as Beneficiaries, legitimately, pursuant to the terms of the Trust agreement. And, if the Beneficiaries, as the Applicant’s children, choose to give to their father, the Applicant, all or some portion of the principal they received from the Trust, then that’s their business and they do not need to explain anything to Medicaid.

So, with the Medicaid Irrevocable Income-Only Trust, the Applicant has protected the brokerage account, as follows: The Applicant transferred the brokerage account to the Trust; the Applicant will keep the same amount of income from the Trust as he had been receiving from the account before he transferred it to the Trust; none of the principal will be available to Medicaid; but, if the Applicant ever needs principal, then his children can decide at that time to give him some.

Here are a few points to consider when using a Medicaid Irrevocable Income-Only Trust:

  • A Medicaid Irrevocable Income-Only Trust-based plan should only be considered with the help of a qualified Elder Law attorney.
  • Penalty periods and look-back periods are real, but only in the world of nursing home Medicaid benefits.
  • A Medicaid Irrevocable Income-Only Trust based plan should be contemplated with great caution if there is a real risk of imminent nursing home care.

The Medicaid Irrevocable Income-Only Trust is only one tool in the Medicaid planning toolbox. If you would like to learn more about Medicaid Irrevocable Income-Only Trusts and other types of Medicaid planning, or have questions regarding the above, please contact us at (877) 207-6803 or info@asherlawfirm.com.

About Jeffrey A. Asher

Jeffrey A. Asher is admitted to practice in NY and CT. Mr. Asher is a member of the New York State Bar Association, where he serves on the Executive Committee of the Elder Law and Special Needs Section, the Executive Committee of the Trusts and Estates Law Section, is co-chair of the Legislation Committee of the NYSBA Elder Law and Special Needs Section, is co-chair of the Committee on Elderly and Disabled of the NYSBA Trusts and Estates Law Section, and is Chair of the Elder Law Section of the New York County Lawyers’ Association. Mr. Asher recently appeared in the HBO Documentary “Bobby Fischer Against the World: Fight for the Fischer Estate.” Mr. Asher also is a legal commentator on Trusts and Estates and Elder Law matters for Court TV, TruTV, and CNN Headline News.

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