Does a Trust Protect Your Assets from Medicaid in New York?

A common question many people have is, does a trust protect one's assets from Medicaid in New York? Will putting assets into a trust protect those assets if you later need Medicaid to pay for long-term care costs. The answer depends on the type of trust involved.

Revocable vs. Irrevocable Trusts

A revocable living trust, which allows you to retain control of the assets and change the terms of the trust at any time, provides no asset protection for Medicaid purposes in New York. Assets in a revocable trust are still considered available resources when determining Medicaid eligibility.

On the other hand, an irrevocable trust, which permanently transfers assets out of your control, may potentially shelter those assets from Medicaid - but only after a five-year look-back period. Medicaid rules allow the state to examine any asset transfers made in the five years prior to applying for benefits. Transfers to an irrevocable trust within that five-year window could trigger a penalty period of Medicaid ineligibility.

Medicaid's Five-Year Look-Back Period

Medicaid's five-year look-back period is a critical consideration when transferring assets to an irrevocable trust for Medicaid planning purposes. If you transfer assets to an irrevocable trust within five years of applying for Medicaid benefits, those transfers can trigger penalties in the form of a period of ineligibility for Medicaid coverage. This means that, during this period of ineligibility, you will have to pay for long-term care costs from your own pocket, which could reduce your assets. However, once you comply with the penalty period of ineligibility, those assets in an irrevocable trust can be exempt from the Medicaid estate recovery program.

For example, let's say you transferred $200,000 into an irrevocable trust three years before needing to apply for Medicaid to cover long-term care costs. Medicaid would consider this transfer as a gift, and based on the average cost of nursing home care in your area, they would calculate a penalty period during which you would be ineligible for benefits. In New York City, as of 2024, the average monthly cost of care is $14,273 per month. Thus, the penalty period would be 14.01 months ($200,000 divided by $14,273).

Even if you successfully transfer assets to an irrevocable trust outside the five-year look-back window, the wording of the trust document is crucial to ensure the assets are truly protected from Medicaid recovery. If the trust is not properly drafted, Medicaid may still consider the assets available, defeating the purpose of the trust.

For instance, if the irrevocable trust allows the trustee to distribute funds for your benefit, such as paying for your living expenses or medical care, Medicaid may argue that the trust assets are still available resources. This could lead to the denial of Medicaid benefits or the requirement to spend down the trust assets before qualifying for coverage.

To avoid these issues, the language of the irrevocable trust must be carefully crafted to ensure that the assets are not considered available to the Medicaid applicant. This may involve limiting the trustee's discretion to make distributions, specifying that distributions cannot be made for the benefit of the Medicaid applicant, and outlining the specific purposes for which the trust assets can be used.

Specialized Trusts for Specific Situations

Supplemental needs trusts and pooled income trusts can protect assets for disabled or elderly Medicaid applicants in certain situations. However, these trusts must be set up in a very specific way and must meet stringent legal criteria in order to successfully shelter assets for Medicaid purposes.

For disabled individuals under age 65, a first-party supplemental needs trust (also known as a self-settled or d4A trust) can be established to hold the individual's own assets, such as an inheritance or personal injury settlement. The trust must be created by a parent, grandparent, legal guardian, or court, and the beneficiary must be under age 65 and disabled according to Social Security criteria. Upon the beneficiary's death, any remaining assets must first be used to reimburse Medicaid for expenses paid on their behalf.

A third-party supplemental needs trust can be created and funded by someone other than the disabled beneficiary, such as a family member, using their own assets. This type of trust has no Medicaid payback requirement and can continue to benefit the disabled individual after the grantor's death.

Pooled income trusts are another option for disabled individuals of any age. These trusts are managed by non-profit organizations and pool the resources of many beneficiaries, while still maintaining separate accounts for each individual. Beneficiaries can transfer their own income, such as Social Security or pension benefits, into the trust to qualify for Medicaid. The trust can then make distributions to cover the individual's supplemental needs, such as clothing, recreation, and uncovered medical expenses.

All these trusts, except for the pooled income trust, must be established outside of the Medicaid lookback period of five years in order not to trigger the penalty.

The Medicaid rules around trusts are extremely complex. Whether a trust protects assets or not depends on the details of the trust, the timing of the asset transfer, and your specific situation. Consulting with an experienced New York elder law attorney like us to determine if a trust is essential in your Medicaid planning. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. You can call us at 212-233-1233 or send us an email at [email protected].