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October 30, 2003 Saugus Advertiser
Testamentary Trusts and Medicaid Planning
Due to budget constraints and the soaring costs of medical care there has been a change in the perception that the “Home” should be protected and be able to be passed on to the next generation. By the law changes that have taken place during the year 2003, it would appear that our law makers are trying to force everyone into purchasing long-term care insurance to protect the “Home”. Unfortunately, even if you purchase long term care insurance, protecting your home is not guaranteed because of regulations that say if you don’t have 2 years of nursing home coverage remaining on your policy your house is not safe. The use of a testamentary trust could protect the home in certain cases.
A testamentary trust is a trust that is formed by your will. Instead of the typical husband and wife will where each spouse leaves everything to the surviving spouse, we leave everything to a trust for the benefit of the surviving spouse. Typically, it would say that all of your probate assets would go to a trust for the benefit of your spouse, if alive, otherwise to your children.
Probate assets are any assets in your name alone. It does not include joint accounts, life insurance, IRA’s and pension plans. When the testamentary trust is used it is very important to re-title assets into separate names or the objective will not be met.
The idea behind using the testamentary trust is to be able to protect one-half of your assets from the costs of long-term care. The protection would only work if the first to die did not suffer a long stay in a nursing home.
In Medicaid planning there is an underlying theme that you can’t give away all of your assets and then ask the state to pay for your nursing home care. The use of testamentary trusts can in some cases protect assets and allow a surviving spouse who later needs long-term care to be covered by MassHealth (Medicaid).
There is one classic scenario when a testamentary trust should always be used. When one spouse is diagnosed with a terminal illness and will die in the near future, that spouse should prepare a new will containing a testamentary trust. At the same time all of the assets should be transferred to the sick spouse. (We are assuming that total assets are less than $1,000,000.) The trust is for the benefit of the surviving spouse and he/she may receive distributions of any amount from the trust. Should the surviving spouse ever require long-term care, the assets of the trust are non-countable to the surviving spouse. Upon the death of the surviving spouse, the assets would be distributed to the children.
As more and more planning options are taken away from families trying to protect their life savings the use of testamentary trust is increasing. Families are taking advantage of this planning opportunity to try and protect one-half of their assets. If the first spouse to die does not require a long-term placement in a nursing home, the use of the testamentary trust can protect one-half of the family’s assets.
Because we don’t know what the future holds for us we always recommend that everyone prepare durable power of attorney forms and health care proxy forms. The durable power of attorney forms will allow us to make any transfers necessary to reach the family’s financial objectives.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Ma. He also holds a masters in accounting and a masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys.