Medicaid – Trust Planning

Trusts can be important in the implementation of a Medicaid plan for seniors or individuals with disabilities who are seeking medical assistance.

Medicaid Trust Rules

A trust, for Medicaid purposes, is an instrument created by the individual, his or her spouse, a person or a court with authority to act on behalf of the individual or his or her spouse, or anyone acting at the direction of the individual or his or her spouse.

The law provides that if there are any circumstances under which any payment can be made to the grantor, the person who created the Trust, then that portion of the principal or the income from which the payment could be made is deemed available for Medicaid purposes. This applies to all trusts established on or after August 11, 1993 for determining Medicaid in New York State.

Therefore, if a trust provides that principal can be paid back to the grantor, even only for a limited purpose, then the entire principal of the trust would be deemed available to the grantor, even if this purpose is remote.

Look Back and Penalty Period

A look back period is the 60 month period preceding the Medicaid application during which the local Medicaid agency will examine all financial transactions and transfers.

The effect of the look back period is to determine if assets were transferred for less than fair market value (a gift) and if so, to determine the appropriate penalty period. The penalty period will depend entirely on the value of the assets transferred. If an individual places $100,000 into a trust, the penalty period is approximately 10 months (assuming a nursing home average regional private pay rate of $10,000 per month), the individual would be Medicaid eligible 10 months after being in a nursing and filing the application. This is true whether the transfer was outright or in trust. Actual rate for Northern Metropolitan New York, Dutchess, Westchester, Orange, etc., is $10,335.00 per month.

Irrevocable Income Only Trust

An irrevocable income only trust can be set up to enable the grantor to continue receiving income from the trust assets but without having access to the principal. This type of trust eliminates the trustee’s discretion to distribute principal to or for the benefit of the grantor.

An individual is interested in protecting assets in the event of a catastrophic illness, but at the same time desires to continue to receive income from those assets because he or she requires the income to meet their living expenses. In such a case, the irrevocable income only trust may be beneficial because the assets can be protected in the event the grantor obtains Medicaid after the passage the look back period or the Medicaid transfer penalty period.

A) The trust can also be drafted so that the funding of the trust is treated as an incomplete gift for gift tax purposes.

B) The trust can be set up as a grantor-type trust for income tax purposes, so that the grantor will report the income on his or her individual income tax returns. This is especially beneficial when an appreciated residence is sold by the trust during the grantor’s lifetime because the grantor can take advantage of the $250,000 capital gain exclusion and real property tax exemptions.

C) For estate tax purposes, the trust assets are included in the grantor’s estate. This can be beneficial when the grantor has an estate of less than $1,000,000 and the trust is funded with appreciated assets. Upon the grantor’s death, the trust assets will receive a step up in basis, without NYS estate taxes.

D) Care must be taken when gifting or funding the trust. Sufficient assets outside the trust must be available to pay for living expenses and long-term care during any Medicaid penalty period created by the transfer.

Exempt Trusts

There are three types of trusts that are exempt from the Medicaid qualifying trust rules, from the 60-month look back period and the transfer penalty rules.

A) Special Needs Trust

One type of exempt trust is the self settled special needs trust which is available only to disabled individuals who are under the age of 65. The special needs trust (sometimes referred to as a “payback trust”) is funded with the assets of the disabled individual under age 65 and must be created for his or her benefit by either: a parent, a grandparent, a legal guardian or a court using the beneficaries’ own assets. The funding of the trust will not affect the Medicaid eligibility of the disabled individual.

If a self settled special needs trust is created for a disabled individual who is under the age of 65, then the trust will remain exempt if the individual lives beyond 65. Any assets added to the trust after the individual reaches 65 will be subject to the Medicaid transfer penalty rules.

Upon the death of the disabled individual, any balance left in the trust must be paid back to the Department of Social Services in an amount not to exceed the Medicaid benefits paid on behalf of the disabled individual. The remaining balance can then be distributed to the beneficiaries of the trust as provided for in the trust agreement.

   B) Income Cap Trust

The second exempt trust, income cap trust, has no application in New York State. It is a trust funded solely with an individual’s income. It is useful only in an income cap state. An income cap state is one in which the state establishes a maximum income level for Medicaid. If an individual has income, even one dollar, in excess of the maximum income level or income cap, such individual is not eligible for Medicaid, even if the medical expenses are greater than the income over the income cap. For example, an individual in an income cap state could be ineligible for Medicaid because of a $10 per month income excess, and have no Medicaid coverage for a monthly nursing home bill of $7,000.

     C) Pooled Trusts

The third exempt trust is the “pooled trust” which is available to residents of every state. In a pooled trust, the assets of many disabled individuals are held in a single trust with a separate account for each individual. Like the special needs trust, this trust is limited to disabled individuals, but there is no requirement that the individual be under the age of 65. A disabled individual of any age can benefit from the pooled trust but the funding of a pooled trust by an individual over the age of 65 will result in a Medicaid transfer penalty period.

For a pooled trust to be exempt, it is required that it be established and managed by a non-profit association and that a separate account for each disabled individual be maintained within the trust. These trusts may be funded by the disabled individual, or his or her parents, grandparents, legal guardian or by a court.

Like the other two exempt trusts, the pooled trust also requires a payback provision. Upon the death of the disabled individual, the balance in his or her account, up to the amount of Medicaid paid on his or her behalf, must be paid back to the Department of Social Services. However, if the individual elects to leave his or her remaining funds in the trust after his or her death, the payback requirement will not apply.

Third Party Supplemental Needs Trust

Third party supplemental needs trusts can be established by an individual with the individual’s own assets for the benefit of a third party disabled beneficiary to supplement, but not duplicate or reduce, Medicaid benefits. There is no required payback to the state for Medicaid provided to the disabled beneficiary.

The trust is designed to prevent any payment that could result in a reduction or termination of Medicaid eligibility. The funding of the trust will have no effect on the beneficiary’s Medicaid eligibility because the beneficiary’s assets are not used to create the trust. Moreover, once the trust becomes effective, any payments made on behalf of the disabled beneficiary should not affect his or her Medicaid eligibility.


The use of trusts in the context of Medicaid planning offers individuals an opportunity to protect one’s assets. Depending upon the client’s objectives, different types of trusts will meet different objectives.