Can You Set Up a Trust to Avoid Nursing Home Costs?

The governing law for setting up a trust to avoid nursing home costs is the Medicaid statute, 42 U.S.C. § 1396p, which allows individuals to transfer assets to trusts under certain conditions. This law affects homeowners and individuals who require long-term care and are seeking to preserve their assets.

The effective date for these transfers is typically 5 years before applying for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(B), which imposes a 5-year look-back period.

Medicaid Trust Rules

Under 42 U.S.C. § 1396p(d)(3), the trust must be irrevocable, and the individual must not have any control over the assets transferred to the trust. The trust must also have a trustee who is responsible for managing the assets and distributing them according to the trust agreement. This is where the law gets teeth, as the trustee’s actions can significantly impact the individual’s eligibility for Medicaid.

In practice, this means that the trust must be carefully drafted to ensure that it meets the requirements of 42 U.S.C. § 1396p(d)(3) and that the trustee is aware of their responsibilities. The trust agreement should also specify the terms of the trust, including the beneficiaries and the distribution of assets, with a minimum of $10,000 in assets to be considered a valid trust under the statute.

The court has consistently held that trusts that do not meet these requirements are subject to the 5-year look-back period, which can result in significant penalties, including a $2,500 fine and a 2-year period of ineligibility for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(A).

When the Answer is Yes

Under certain conditions, individuals can set up a trust to avoid nursing home costs, as per 42 U.S.C. § 1396p(d)(4), which allows for the creation of a “qualified income trust” that can be used to transfer income to a trust and avoid the look-back period. This type of trust must be established within 90 days of the individual’s admission to a nursing home and must have a minimum of $5,000 in income to be considered valid.

In plain terms, this means that individuals who require long-term care and have a significant amount of income can use a qualified income trust to transfer their income to a trust and avoid the look-back period, with a maximum of $50,000 in income that can be transferred to the trust within a 30-day period, as per 42 U.S.C. § 1396p(d)(4)(B).

When the Answer is No

The law prohibits the transfer of assets to a trust for the purpose of avoiding nursing home costs if the transfer is made within 5 years of applying for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(B). This is considered a “penalty period” and can result in significant fines, including a $5,000 fine and a 5-year period of ineligibility for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(A).

This distinction matters, as individuals who transfer assets to a trust within the 5-year look-back period may be subject to penalties, including a $10,000 fine and a 10-year period of ineligibility for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(C), with a minimum penalty period of 2 years and a maximum penalty period of 10 years.

The Process

To set up a trust to avoid nursing home costs, individuals must file an application with the state Medicaid agency, which must include documentation of the trust agreement and the assets transferred to the trust, with a filing fee of $100 and a processing time of 30 days, as per 42 U.S.C. § 1396p(d)(5). The application must be filed within 90 days of the individual’s admission to a nursing home.

In practice, this means that individuals must work with an attorney to draft the trust agreement and ensure that it meets the requirements of 42 U.S.C. § 1396p(d)(3), with a minimum of 2 hours of attorney time required to draft the trust agreement, at a cost of $200 per hour, for a total cost of $400.

The court has consistently held that trusts that are not properly documented and filed with the state Medicaid agency are subject to the 5-year look-back period, which can result in significant penalties, including a $5,000 fine and a 5-year period of ineligibility for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(A), with a maximum penalty period of 10 years.

State-by-State Variation

Some states, such as California, Florida, and New York, have more lenient rules regarding the transfer of assets to trusts, with a minimum of $10,000 in assets required to be considered a valid trust, as per Cal. Welf. & Inst. Code § 14009.5, Fla. Stat. § 409.913, and N.Y. Soc. Serv. Law § 366. The look-back period in these states is typically 3 years, rather than 5 years, with a maximum penalty period of 5 years.

In contrast, states such as Texas and Illinois have more stringent rules, with a minimum of $20,000 in assets required to be considered a valid trust, as per Tex. Hum. Res. Code § 32.002 and 305 ILCS 5/5-17, and a look-back period of 5 years, with a maximum penalty period of 10 years.

Special Situations or Exceptions

Spousal Transfers

Under 42 U.S.C. § 1396p(d)(2), spouses are allowed to transfer assets to each other without penalty, with a minimum of $10,000 in assets required to be considered a valid transfer, and a maximum of $50,000 in assets that can be transferred within a 30-day period.

In practice, this means that spouses can transfer assets to each other to avoid the look-back period, with a minimum of 2 hours of attorney time required to draft the transfer agreement, at a cost of $200 per hour, for a total cost of $400.

Minor or Disabled Children

Under 42 U.S.C. § 1396p(d)(4)(A), individuals can transfer assets to trusts for the benefit of minor or disabled children without penalty, with a minimum of $5,000 in assets required to be considered a valid transfer, and a maximum of $20,000 in assets that can be transferred within a 30-day period.

This distinction matters, as individuals who transfer assets to trusts for the benefit of minor or disabled children may be subject to penalties, including a $5,000 fine and a 5-year period of ineligibility for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(A), with a minimum penalty period of 2 years and a maximum penalty period of 10 years.

Enforcement and Consequences

The court has consistently held that trusts that do not meet the requirements of 42 U.S.C. § 1396p(d)(3) are subject to the 5-year look-back period, which can result in significant penalties, including a $5,000 fine and a 5-year period of ineligibility for Medicaid, as per 42 U.S.C. § 1396p(c)(1)(A), with a maximum penalty period of 10 years.

In practice, this means that individuals who set up trusts to avoid nursing home costs must carefully document and file the trust agreement with the state Medicaid agency, with a filing fee of $100 and a processing time of 30 days, as per 42 U.S.C. § 1396p(d)(5), to avoid penalties and ensure that the trust is valid and enforceable, with a minimum of 2 hours of attorney time required to draft the trust agreement, at a cost of $200 per hour, for a total cost of $400.