Learn about these two trusts that help you qualify for Medicaid

Many government benefit programs have financial eligibility restrictions. They are means-tested, meaning that the government will grant benefits only when assets are limited to a certain amount. While high income earners may not find it necessary to qualify for these benefits, and low income earners have no reason to worry about their eligibility, those who earn a little too much to qualify, but are close, should consider using one of the below two trusts to fall into this range.

The Qualified Income Trust

If you are interested in receiving benefits through Medicaid, you should consider the Qualified Income Trust. In 2020, the income limit for Medicaid eligibility is set at less than $2,349 per month for a single individual who is 65 years or older. (For married couples, the situation is a little less straightforward, but generally, a couple’s income is counted separately.)

So what happens if your monthly income is $2400, which is barely above the income limit? You cannot simply give away the extra income last minute, because that would violate the Medicaid Look-Back Period. This is a rule set by Medicaid that states that any gifts or transfers of assets made within five years of the Medicaid application date are subject to penalties. Furthermore, in many states (including Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, and Wyoming), you cannot simply “spend down” the excess income on medical care to reach the qualifying limit. So if you are a resident of these states, a potential solution would be to use a Qualified Income Trust.

The QIT is used by those who are ineligible for Medicaid benefits because of their high income, yet do not have enough income to pay for long term care. Qualified Income Trusts directly deposit an individual’s excess income - the income that exceeds the limit for Medicaid benefits - into the trust. For example, if you earn $2400 monthly, $51 would be deposited into the trust. This account could also be described as restricted in this case, in that these funds can only be used to pay for medical bills and care costs, such as nursing home bills. Because the income directed into this fund is not counted towards the income limit for Medicaid, the individual becomes eligible for benefits. 

There are different laws for each state that relate to Qualified Income Trusts’ purposes and beneficiaries. But in all cases, the QIT should be an irrevocable trust, meaning that its terms cannot be modified. A trustee must also be appointed, usually a relative who can help you write checks from the trust for your medical expenses and care. The beneficiary of the trust should usually be Medicaid, although this is not a requirement in some states. (For more on how trusts work, please click here.)

Qualified Income Trusts are also called different names depending on what state you are in: in New Mexico, they are called “Income Diversion Trusts”, and in Arizona, they are called “Income Only Trusts”. It may also be referred to as “Income Cap Trusts”, “Medicaid Income-Only Trusts”, “Income Assignment Trusts”, so it is helpful to note that these names are all referring to Qualified Income Trusts. Search around in your state to see what the name of the trust is—or consider using our concierge service at Peacefully to track this down. For more on our concierge service, click here.

The Special Needs Trust

Another type of trust which can help you or your heir qualify for benefits is the Special Needs Trust, also known as the Supplemental Needs Trust.

If you have a disability or have a child with special needs, this trust can be used to receive benefits from Medicaid, along with other benefits from programs such as Supplemental Security Income (SSI). SSI is a federal disability benefit that extends eligibility to those who are disabled, blind, or over 65. It is only available to those who meet SSA (Social Security Administration) standards of income and asset limits.

Those who are applying for or are already on SSI may be at risk of losing their benefits when they receive a large sum of inheritance, so the Special Needs Trust is often used to allow people to leave an inheritance for their disabled child without the risk of disqualifying the child from receiving benefits. 

This type of trust can be either a Living Trust or a Testamentary Trust, meaning that it can be created by trust grantors either during their lifetime, or as part of their will. Once assets are transferred into the trust, they do not count towards eligibility limits in most cases. The assets must be used for the sole benefit of the beneficiary and can be used to supplement public benefits, but not supersede them. The assets can be used to pay for clothes, physical therapy, entertainment, travel, and education. However, the assets should not be used to purchase basic necessities like food or shelter, because the money used in these kinds of purchases may be considered "in-kind" support and maintenance (ISM). ISM can eliminate or reduce benefits you are eligible to receive otherwise. 

Both the Special Needs Trust and the Qualified Income Trust can be great tools for letting you meet eligibility requirements for certain benefits of your choice. But because the instructions and requirements for these trusts are greatly dependent on the regulations of each state, be sure to check the laws of your state before proceeding with making these trusts.

Or, if you have any further questions or require additional assistance, the concierge service here at Peacefully can help you. We assist with referrals to trusted professionals, offering case-specific advice, recommendations, and coordination for you. For more about our concierge service or to schedule a free consultation, click here.

— Lucy Jung