When it comes to long-term care planning, one of the most valuable yet often misunderstood tools is Medicaid—a joint federal and state program that provides health coverage to millions of Americans, including elderly individuals who need assistance with nursing home or in-home care. For many retirees, Medicaid becomes essential when out-of-pocket care costs threaten to deplete a lifetime of savings.
Unlike Medicare, which provides general health coverage for seniors but has limited long-term care benefits, Medicaid does cover extended nursing home care and certain types of home and community-based services. However, it comes with strict financial qualifications, which can pose a challenge for individuals who have accumulated assets over their lifetime.
Understanding Medicaid Eligibility
To qualify for Medicaid long-term care, an individual must meet income and asset thresholds set by the state. Certain assets—like a primary residence (within equity limits), personal belongings, and one vehicle—are exempt, but retirement accounts, savings, and investments generally are not.
This creates a difficult choice: spend down assets to qualify or risk being ineligible for coverage. That’s where trusts come into play.
Properly structured trusts can help individuals preserve wealth for their families while still meeting Medicaid eligibility requirements.
An irrevocable trust is a legal structure where assets are permanently transferred out of the individual’s name. Once in the trust, those assets are no longer considered “available” for Medicaid eligibility purposes—but only after a 5-year look-back period. This means any transfer made within five years of applying for Medicaid may be subject to penalties or a delay in benefits.
These trusts are commonly used to:
- Shield the family home from being counted or recovered by Medicaid after death.
- Preserve savings or investments for heirs while still qualifying for care.
- Structure income distributions in a way that aligns with Medicaid rules.
Irrevocable trusts must be created and funded well in advance of any need for care, making early planning essential.
Unlike irrevocable trusts, revocable living trusts—while helpful for avoiding probate—do not protect assets from Medicaid’s asset test. Since the grantor retains control and can revoke the trust at any time, these assets are considered available and fully countable.
Special Needs Trusts: Protecting Disabled Individuals
For individuals under age 65 with disabilities, First-Party Special Needs Trusts allow assets (such as an inheritance or personal injury settlement) to be held in trust without jeopardizing Medicaid eligibility. These trusts are structured to supplement—not replace—government benefits.
Family members can also establish Third-Party Special Needs Trusts to benefit a disabled loved one, offering long-term financial support without disqualifying them from Medicaid or Supplemental Security Income (SSI).
Trusts for Spouses: Safeguarding the Healthy Partner
When one spouse requires long-term care, Medicaid rules aim to protect the financial well-being of the “Community Spouse”—the one who remains at home. A trust can help:
- Direct income to the healthy spouse, ensuring they have the resources needed to live independently.
- Prevent the loss of jointly owned property or retirement funds due to care costs.
These trusts must be carefully designed to comply with Medicaid’s spousal impoverishment rules, which allow for certain asset and income protections.
Even after someone qualifies for Medicaid, the program can attempt to recover the costs of care from their estate after death. This is known as estate recovery, and it often targets the home unless it is protected. Irrevocable trusts and certain spousal trust structures can help avoid this outcome, preserving assets for children and other beneficiaries.
Final Thoughts: Early Planning Is Key
Medicaid planning with trusts is a powerful strategy, but one that requires careful timing and legal expertise. Trusts must be set up in advance of need—ideally five or more years beforehand—and must comply with complex federal and state rules.
Working with your WNY Asset Management Advisor and an elder law attorney who understands Medicaid’s intricacies is essential. With thoughtful planning, you can:
- Ensure access to quality long-term care,
- Protect the financial future of your spouse and heirs,
- And preserve a lifetime of savings from being eroded by healthcare costs.
If you’re thinking about the future—for yourself, your spouse, or an aging parent—now is the time to act. Schedule a conversation with us to explore whether trust planning should be part of your long-term care and estate strategy. The right guidance today can help you make confident, informed decisions that protect both your health and your legacy tomorrow.