Here is an example from one of the many cases I have taken on recently to correct this misguided planning: A married couple has one spouse who anticipates needing Medicaid. They fear losing their home to estate recovery, so they go to an attorney who advertises Medicaid planning as a service.
The couple is told they can put their home, with cash assets not needed during their lifetime, into an irrevocable trust for their children, and the trust does not allow the principal or interest to be used for their benefit. It does, however, allow them to live in their home for the rest of their lives and it protects the step-up in basis for capital gains when they die. According to the attorney, this avoids estate recovery.
Most attorneys who use these trusts warn clients that funding the trust is treated the same as a gift for the five-year look back by Medicaid. So warned, the couple waits five years and then applies for Medicaid.
The Department of Social and Health Services (DSHS) promptly denies benefits, not for a certain period of ineligibility based on the value of the transfer but until they fix the unfixable and get the home out of the trust, which is designed to not allow them take assets out of it.
If they are lucky, the trust grants a trust-protector the power to terminate the trust. If they are not lucky, things get complicated.
Avoid the Medicaid Planning WAC Job
Why do so many intelligent and well-meaning attorneys keep making this same mistake? Simply, they have not studied all the Medicaid-related Washington Administrative Codes (WACs) and traced each to its logical conclusions. Even Medicaid nerds would be hard-pressed to find these rules if not looking for them. Without getting overly specific, here is a summary of the issue:
A portion of WAC 182-512 allows a single person’s home with up to $1,097,000 in equity or a married couple’s home with unlimited equity to be an available but excluded resource for Medicaid, although it may be subject to estate recovery. Other excluded assets, such as their car, can be transferred without penalty because the asset was excluded. Homes are different, and there are few ways to transfer them to anyone except a spouse without penalty.
When cash goes to the trust with the children as the beneficiaries, there is a standard look back of five years. If the application is made less than five years after the trust is funded, there is a period of ineligibility. At the end of the five years, the couple applies for benefits and reports the trust. Easy-peasy — no penalty. If the trust fails to include language that says the couple nay not receive or benefit from any of the income or principal, then, according to WAC 182-516, the assets from which they can benefit remain an available resource and must be spent down.
The trusts in question have such language; however the trust said that the couple can live in the home rent-free for the rest of their lives, creating a beneficial interest in the home. The home is now an available asset, a fact which some of the attorneys grudgingly accept. The couple then argues that even if the home is an available asset, it is an excluded asset. Unfortunately, another section of the WAC states that a home deemed an available asset, due to inclusion in an irrevocable trust, is no longer excluded. The entire equity of the property counts toward the $2,000 limit of an unmarried applicant or the $70,301 limit of a married couple.
The only solution is to terminate the irrevocable trust, which involves a TEDRA agreement with court approval, unless a trust protector can terminate under the terms of the trust. The couple, who have already paid thousands for the trust, must pay another attorney to get them back to where they first started.
Frustratingly, putting the home into the well spouse’s name and an appropriate annuity would protect the home from estate recovery, allow a step-up in basis when the well-spouse dies, and avoid the look back. A simple quit claim deed would prevent the estate recovery for a few hundred dollars rather than the thousands of dollars for the trust. To make matters worse, there are attorneys who have been made aware of this issue by the state, by me, or by their clients, who continue to use this tool to “protect the home.” They insist that the rules are on their side, but won’t take on the fight with the state to set a precedent. There are many areas of specialization in law, and most attorneys would never “dabble” in one of them due to the complex nature of the work.
Medicaid planning can be straight forward if the facts fit the basic rules, which leads many attorneys to believe it is a simple service to offer their clients. Few realize how convoluted the rules get when you step outside of the basics and into the deeper rules and regulations. I would urge anyone who uses irrevocable tool—be it trust, annuity, or something else—to consult with a specialist and find out if your approach will help or harm your clients.
Aaron D. Paker. Aaron has worked on Medicaid cases for Life Point Law since 2015, as a paralegal, as an intern, and now as an attorney. He is a partner in the firm and heads the Medicaid Planning and Probate Departments. He earned his J.D., cum laude, at Seattle University School of Law in 2019, with Cali Awards in Elder Law and Advanced Elder Law. In 2022, he wrote a book to guide Washington residents through the miasma of Medicaid and has since distributed about 1,200 copies. He can be reached at APaker@lifepointlaw.com.
