THE REVOCABLE LIVING TRUST TRAP

Here is a Medicaid rule that often surprises those in nursing homes: if your home property is in a Revocable Living Trust, you cannot qualify for Medicaid for nursing home costs until you take your home out of the trust.  However, if the healthy spouse is living in the home, the Medicaid worker generally ignores the rule, and does not require the home to be taken out of the trust. Then the Revocable Living Trust can become a trap, so that your home could later be lost to nursing home costs.

Let me give you an actual example.  Husband and Wife are elderly.  Wife suffers from dementia, and is not mentally competent.  She is in a nursing home.  Husband is healthy.  Husband and Wife own a home, which is held in their Revocable Living Trusts.  The trusts say that when both Husband and Wife die, the property will go to their children equally.  Medicaid has been paying Wife’s large nursing home expenses for years. 

Wife’s trust says that her half of the trust assets are to be used for her support. Wife is not mentally competent, so she cannot take her half of the property out of the trust.  Husband can take his half of the property out of the trust, but he can only take Wife’s half out of the trust to put it in her name.  If the property is left in both trusts and Wife dies first, the property will all go to husband, and he may be able to give it to his children.  However, the gift will cause a Medicaid penalty period if he needs nursing home help for himself.  If Husband dies first, the property will all go to wife, a Medicaid lien will probably be placed on it, and the entire property could be lost to nursing home costs. 

There is another option.  Husband could give his half of the property to his children now.  However, if Wife outlives Husband and still owns her half of the property at the time she dies, the government will be able to get reimbursed for Medicaid payments out of her half of the property.  This is not a good situation to be in. 

The problem with this trust is that it does not clearly allow Husband or the children to transfer Wife’s property out of the trust to themselves after she is incapacitated.  The trust provides that after she is incapacitated, her trust assets are to be used for her benefit.  If the trust assets can be used only for her benefit, then since Medicaid is paying her nursing home costs, her assets in the trust may have to be used to pay back the government.  A trust like this may be fine for a single person with no children who wants to make sure that no one gets any of her assets unless some assets are left after she dies.  However, if a person has a spouse or children, or would prefer to have a relative or friend, rather than the government, receive her assets, the trust should be worded differently.

Our law office has seen many different trusts written by many different attorneys.  Most trusts have the problem described above.  Most trusts are written so that the assets may become trapped if the person becomes incapacitated and enters a nursing home.  The reason for this is that most trusts were written to avoid probate or estate taxes.  The attorney who prepared the trust was not thinking about protecting assets from nursing home costs. 

The problem can be solved by amending the trust to make it more flexible.  There should be some way of transferring the assets to someone else in case of incapacity.  If you have a trust, it would be a good idea to have it reviewed to make sure it gives you the flexibility you need in case nursing home care becomes necessary.