Medicaid Rules and Trusts

Medicaid rules in Connecticut are very strict and with nursing home costs reaching $18,000 a month, it is a frightening thought for families whose loved ones are at an age where full care might be needed. There are numerous exceptions to the rules, such as not counting the family home (up to $955,000) if one spouse is living in it. But there are numerous sellers of “trusts” hinting that if you buy their trust, assets can be protected. In my experience, this is almost never true because most of these trusts are revocable, and that means the money put into it can be returned to the person who needs it during their lifetime.

If someone tries to sell the idea of a revocable trust to protect assets, they are usually referring to avoiding probate. A revocable trust can “avoid” probate, but it does not avoid the probate fee because in Connecticut the probate fee is not based on property going through probate, but is based on the total dollars shown on the inheritance tax return, even if nothing passes through probate. But the revocable trust does not protect one penny of assets for Medicaid purposes, because the person who made it can revoke it and take it back. So, if an online company or anyone else is suggesting a revocable trust will protect assets, ask the direct question if the assets are protected under the Medicaid rules. They are not.

An irrevocable trust can protect assets from being counted towards Medicaid eligibility, but only if the person making it and the spouse has no right to get back the assets that are put into the trust. The assets can be paid to others, such as children, or grandchildren or anyone else, but not to the person making the trust or that person’s spouse. That is the important difference from a revocable trust and why the irrevocable trust will protect assets from the Medicaid rules, and a revocable trust will not. In some states, these are called asset protection trusts and that is their purpose. But to be effective, there must be tax provisions that allow the person making the trust to keep their $250,000 exemption from capital gains tax on their sale of their home. And if the person making the trust wants to save the heirs from paying a capital gains tax when the heirs sell the house after the parents’ death, the trust must have provisions for that, by including the property in the “taxable estate,” even though there is a zero inheritance tax if an estate if below $9.1 million dollars in 2022.

So, the word to the cautious and wise, is don’t do a revocable trust to protect assets from Medicaid because it won’t work. Good reasons to do a revocable trust are to hold family assets, such as a vacation home, to protect children who might waste assets if property were directly in their names, to handle your financial affairs if you cannot (although a Power of Attorney is simpler), or to avoid probate. But remember that in Connecticut, you cannot avoid the probate fee, whether you have a will, a revocable trust, irrevocable trust, or none of the above. There are many good reasons to do a revocable trust, but protecting the assets from Medicaid is not one of them.