Medicaid (Medical) Planning for Your Estate Plan

Attorney Image By: James Filippi

A very important part of establishing your comprehensive estate plan is addressing Medicaid benefits. Medicaid is the federal government program that provides medical care for those who do not have the means to do so. Here in California, the program is administered by the State under the Medical program. If you don’t plan for these government benefits, you or a loved one may encounter grave, unintended consequences.

Part of the qualifying process for becoming eligible for Medicaid and Medical benefits is an analysis of the amount of assets you have in your estate. If you possess an amount above the maximum allowed, you will not be eligible for benefits until your assets drop below this amount. (The qualifications for Medicaid and Medical benefits are outside the scope of this article.)

There are some significant issues you should be aware. First, if you, or a loved one, are currently receiving these benefits, you could become ineligible at any time in the future. There is no “grandfathering” which occurs when you continue to receive something even though you no longer qualify. This ultimately means you are always at risk of losing your benefits, so you need to be hyper aware of what you “allow” into your estate.

If you have these benefits already, you are likely very aware of what you need to do to maintain the eligibility for them. However, your loved ones may not. This is why it is important for you to ensure they are aware of what your limitations are when it comes to your eligibility for benefits, making estate planning even more crucial.

This brings us back to the reason for this article. How can your estate plan deal with these types of asset-based government benefits? The main vehicle that estate planning attorneys use is the special needs trust (sometimes referred to as a supplemental needs trust). This is a separate, irrevocable trust that names a spouse or loved one as the beneficiary who will receive the benefit of the trust’s assets but won’t have any control of them. The law looks at the trust assets as separate from their estate because they have zero control over what happens with them. However, it allows the assets to be used to enhance the care above the basics that Medicaid or Medical provides. The benefits are obvious if you have ever seen the type of care provided to Medicaid or Medical patients. 

The special needs trust can either be contained in your main trust agreement, which springs to life upon your death, or it can be its own stand-alone trust.  The way the special needs trust is set up really depends on your needs and your estate planning attorney should customize it to fit what you need.

The benefit of having it spring from your existing trust is it will not require you to manage the trust during your lifetime. This is because it doesn’t come to life until you die, and a portion of your assets are sent to it.

However, if you need the trust to be a standalone special needs trust created immediately, there are some management tasks that must be done to maintain the trust. An irrevocable trust is its own taxable entity, which means you will need to file federal (and state, if applicable) tax returns for the trust every year. In order to do this properly, you will need to maintain the books for the trust during the year, which means a whole lot of added work.

Nevertheless, there are a few things you can do to lessen the work required. The complexity of the bookkeeping and tax filings will depend on the assets placed in the trust. To lessen the impact of the amount of work required for the management of the trust, it is suggested that the trust only receive the minimum amount of assets required to achieve the trust’s goals. The fewer the assets, the lesser the income it will generate, and the amount of work required to track the asset movements will be reduced.

Assets can always be added to the trust as needed, and ultimately, the trust itself can be a beneficiary of an already existing trust that manages your main estate, or even a beneficiary of your will.

Another issue arises when you are married and you have a significant amount of separate property assets, or at least enough which will make your spouse ineligible for Medicaid or Medical benefits. This will make you to want to consider a creative option in handling your assets.

You can put instructions in your main trust to send the assets to your last will where there are instructions for your executor to create a testamentary special needs trust. This is similar to the springing special needs trust already discuss in which it springs from your main trust, except with a testamentary trust, it springs from your will instead. This method keeps those assets separate from the joint trust with your spouse, and places them in a special needs trust to keep them out of your spouse’s estate for eligibility purposes for Medicaid or Medical.

There are many issues to address when planning for Medicaid and Medical benefits as well as for the special needs of you and your loved ones. This is why working with a licensed estate planning attorney is critical to making sure you protect yourself and your family. We always stand ready to help you achieve those goals.

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