When NOT to Trust a Trust

Many married couples have established revocable trusts for one reason or other, and have transferred their homes to their trusts. Unfortunately, this sound and logical planning is turned on its head if one of the spouses becomes so ill as to require Medicaid-funded long-term care.

A home is exempt from Medicaid consideration (an asset-sensitive or means-tested program) if it is owned by either or both spouses, and at least one of them lives there. What may be surprising is that a home owned by a couple’s revocable trust (or, more precisely, by one or both spouses as trustee of that trust) is not exempt. Because of that rule, the home must be transferred out of the trust to regain its exemption. Sometimes that is easy and sometimes it is not, depending upon how the trust agreement reads. So that can be the first challenge.

The second challenge involves to whom the home should be transferred. Should it be titled to the healthier spouse? Should it be titled the same way as it was before the trust was created? Medicaid has definite thoughts on this. The only transfer Medicaid recognizes as legitimate is a transfer to the spouse who is ill and needs assistance. Once that is accomplished, the home regains its exempt status, but also becomes subject to estate recovery after both spouses are deceased. This essentially preserves Medicaid’s claim to the value of the residence.

Once the home is out of the trust and titled to the ill spouse it may be possible for that spouse to transfer the home to the other, thus avoiding estate recovery. But that all depends upon whether the ill, institutionalized spouse is still competent or, if not, whether his or her Power of Attorney document authorizes such a gifting transaction. Most do not.

One solution to this sticky situation is to get the home out of the trust before either spouse becomes ill, and then to obtain a Transfer on Death Designation Affidavit leaving the house to the trust upon the passing of one or both spouses. Whether doing this interferes with the original purpose of the trust must be reviewed on a case by case basis.

The real solution—from the perspective of elder law attorneys and the families they serve—is for Medicaid to recognize that a home held in a revocable trust is no different, for exemption purposes, than one held outside a trust.. So far it has been unwilling to do so. The Ohio State Bar Association’s Elder and Special Needs Law Committee, and the Association’s Estate Planning, Trust, and Probate Section, are working together to persuade the General Assembly to change the law. One can always hope….

Posted in Articles, Articles: Elders and Their Caregivers.