For all practical purposes, in the United States the
only "insurance" plan for long-term institutional
care is Medicaid. Lacking access to alternatives
such as paying privately or Medicare, most people
pay out of their own pockets for long-term care
until they become eligible for Medicaid. Although
their names are confusingly alike, Medicaid and
Medicare are quite different programs. For one
thing, all retirees who receive Social Security
benefits also receive Medicare as their health
insurance. Medicare is an "entitlement" program.
Medicaid, on the other hand, is a form of welfare --
or at least that's how it began. So to be eligible for
Medicaid, you must become "impoverished"
under the program's guidelines.

Also, unlike Medicare, which is totally federal,
Medicaid is a joint federal-state program. Each
state operates its own Medicaid system, but this
system must conform to federal guidelines in
order for the state to receive federal money, which
pays for about half the state's Medicaid costs.
(The state picks up the rest of the tab.)

This complicates matters, since the Medicaid
eligibility rules are somewhat different from state
to state, and they keep changing.  Both the federal
government and most state governments seem to
be continually tinkering with the eligibility
requirements and restrictions. This has most
recently occurred with the passage of the Deficit
Reduction Act of 2005 (the DRA) which
significantly changed rules governing the
treatment of asset transfers and homes of nursing
home residents. The implementation of these
changes will proceed state-by-state over the next
few years. The rules for gaining eligibility to the
program are explained in detail in the Medicaid
section of this site. But to be certain of your rights,
consult an ATTORNEY. He or she can guide you
through the complicated rules of the different
programs and help you plan ahead.

Those who are not in immediate need of long-term
care may have the luxury of distributing or
protecting their assets in advance. This way,
when they do need long-term care, they will
quickly qualify for Medicaid benefits. Giving
general rules for so-called "Medicaid planning" is
difficult because every client's case is different.
Some have more savings or income than others.
Some are married, others are single. Some have
family support, others do not. Some own their
own homes, some rent. Still, a number of basic
strategies and tools are typically used in Medicaid


Congress has established a period of ineligibility
for Medicaid for those who transfer assets. This
period of ineligibility is determined by dividing the
amount transferred by what Medicaid determines
to be the average private pay cost of a nursing
home in your state. The DRA significantly
changed rules governing the treatment of asset
transfers. For transfers made prior to enactment of
the DRA on February 8, 2006, state Medicaid
officials will look only at transfers made within the
36 months prior to the Medicaid application (or 60
months if the transfer was made to or from certain
kinds of trusts). But for transfers made after
passage of the DRA the so-called “lookback”
period for all transfers is 60 months.

Another significant change in the treatment of
transfers made by the DRA has to do with when
the penalty period created by the transfer begins.
Under the prior law, the 20-month penalty period
created by a transfer of $100,000 in the example
described above would begin either on the first
day of the month during which the transfer
occurred, or on the first day of the following
month, depending on the state. Under the DRA,
the 20-month period will not begin until (1) the
transferor has moved to a nursing home, (2) he
has spent down to the asset limit for Medicaid
eligibility, (3) has applied for Medicaid coverage,
and (4) has been approved for coverage but for
the transfer.


The problem with transferring assets is that you
have given them away. You no longer control
them, and even a trusted child or other relative
may lose them. A safer approach is to put them in
a living (or "inter vivos") trust. A trust is a legal
entity under which one person -- the "trustee" --
holds legal title to property for the benefit of
others -- the "beneficiaries." The trustee must
follow the rules provided in the trust instrument.
Whether trust assets are counted against
Medicaid's resource limits depends on the terms
of the trust and who created it.

A "
revocable" trust is one that may be changed or
rescinded by the person who created it. Medicaid
considers the principal of such trusts (that is, the
funds that make up the trust) to be assets that are
countable in determining Medicaid eligibility.
Thus, revocable trusts are of no use in Medicaid

Income-only Trusts

An "irrevocable" trust, on the other hand, is one
that cannot be changed after it has been created.
In most cases, this type of trust is drafted so that
the income is payable to you (the person
establishing the trust, called the "grantor") for life,
and the principal cannot be touched during your
life. At your death the principal is paid to your
heirs. This way, the funds in the trust are
protected and you can use the income for your
living expenses. For Medicaid purposes, the
principal in such trusts is not counted as a
resource, provided the trustee cannot pay it to
you or for your benefit. However, if you do move
to a nursing home, the trust income will have to go
to the nursing home.

You should be aware of the drawbacks to such an
arrangement. It is very rigid, so you cannot gain
access to the trust funds even if you need them
for some other purpose. For this reason, you
should always leave an ample cushion of ready
funds outside the trust.

You may also choose to place property in a trust
from which even payments of income to you or
your spouse cannot be made. Instead, the trust
may be set up for the benefit of your children, or
others. These beneficiaries may, at their
discretion, return the favor by using the property
for your benefit if necessary. However, there is no
legal requirement that they do so.

One advantage of these trusts is that if they
contain property that has increased in value, such
as real estate or stock, you (the grantor) can retain
a "
special testamentary power of appointment" so
that the beneficiaries receive the property with a
step-up in basis at your death. This will also
prevent the need to file a gift tax return upon the
funding of the trust.

Remember, funding an irrevocable trust can
cause you to be ineligible for Medicaid for five

Testamentary Trusts

Testamentary trusts are trusts created under a
will. The Medicaid rules provide a special "
" for testamentary trusts created by a
deceased spouse for the benefit of a surviving
spouse. The assets of these trusts are treated as
available to the Medicaid applicant only to the
extent that the trustee has an obligation to pay for
the applicant's support. If payments are solely at
the trustee's discretion, they are considered

Therefore, these testamentary trusts can provide
an important mechanism for community spouses
to leave funds for their surviving institutionalized
husband or wife that can be used to pay for
services that are not covered by Medicaid. These
may include extra therapy, special equipment,
evaluation by medical specialists or others, legal
fees, visits by family members, or transfers to
another nursing home if that became necessary.
But remember that if you create a trust for yourself
or your spouse during life (i.e., not a testamentary
trust), the trust funds are considered available if
the trustee has the ability to use them for you or
your spouse.

Supplemental Needs Trusts

The Medicaid rules also have certain exceptions
for transfers for the s
ole benefit of disabled people
under age 65
. Even after moving to a nursing
home, if you have a child, other relative, or even a
friend who is under age 65 and disabled, you can
transfer assets into a trust for his or her benefit
without incurring any period of ineligibility. If these
trusts are properly structured, the funds in them
will not be considered to belong to the beneficiary
in determining his or her own Medicaid eligibility.
The only drawback to supplemental needs trusts
(also called "special needs trusts") is that after the
disabled individual dies, the state must be
reimbursed for any Medicaid funds spent on
behalf of the disabled person.

Supplemental needs trusts are usually created by
a parent or other family member for a disabled
child (even though the child may be an adult). Or,
the disabled individual can create the trust with
his or her own money, provided the trust meets
certain requirements. These latter trusts are
sometimes called "(d)(4)(A)" trusts, which refers to
the authorizing statute.
The Attorney's Role

Do you need an
attorney for even
"simple" Medicaid
planning? This
depends on your
situation, but in most
cases, the prudent
answer would be
yes." The social
worker at your
mother's nursing
home assigned to
assist in preparing a
Medicaid application
for your mother
knows a lot about
the program, but
maybe not the
particular rule that
applies in your case
or the newest
changes in the law.
In addition, by the
time you're applying
for Medicaid, you
may have missed
out on significant

The best bet is to
consult with a
professional who
can advise you on
the entire situation.
At the very least, the
price of the
consultation should
purchase some
peace of mind. And
what you learn can
mean significant
financial savings or
better care for you or
your loved one. As
described above,
this may involve the
use of trusts,
transfers of assets,
purchase of
annuities or
increased income
and resource
allowances for the
healthy spouse.

If you are going to
consult with a
professional, the
sooner the better. If
you wait, it may be
too late to take some
steps available to
preserve your

PHONE: 503.365.0659
FAX: 503.365.
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PHONE: 503.365.0659
FAX: 503.365.3823
Map & Directions: