The Pitfalls of Revocable Living Trusts In Medicaid Planning

June and Ward Clevinger had worked hard all their lives. They raised two boys, Wallace and Theodore, and were settling down into a nice retirement.

Several years earlier, the Clevingers had attended a workshop on living trusts and, after much discussion, they established the Clevinger Family Living Trust. They thought this was a great idea… and they were right… until Ward's stroke.

Ward went from the hospital to the Shady Rest Nursing Home, and June went to the ODJFS (i.e. the Ohio Department of Job & Family Services) to learn how to pay for Ward's care. June explained to the caseworker that their assets were rather modest and at this time, all they had left was $75,000 in certificates of deposit and their home. Fortunately, June said, she and Ward had established a revocable living trust several years ago, to avoid probate and handle situations if one of them became ill. At least they had done that right, she said. So June went ahead and applied for Medicaid.

She was shocked to later get a letter from the Medicaid authorities telling her that her home was not an exempt asset and she didn't qualify for Medicaid. The reason, according to ODJFS, is that if a home is owned by a trust, it is considered non-exempt property and it inflates the amount of countable assets the couple has. In other words, since Ward and June have $75,000 in CDs and a $100,000 house in a trust, then Medicaid says that they have total countable assets of $175,000.

And according to Ohio law, the community spouse (i.e. June) can keep a maximum of $90,660. Since the house, in trust, has a value of $100,000, June could spend all of her other assets… every last penny… keep only the house, in trust, and still not qualify for Medicaid . That's because, as long as the house is in the trust, it is not an exempt asset, and since its value is more than $90,660, in this case she cannot qualify Ward for Medicaid as long as the house remains in the trust.

It bears noting that the Medicaid position on this matter is incorrect. In fact, the Health Care Financing Administration specifically states in HCFA Transmittal Number 64 that placing non-countable assets in a revocable trust does not affect the exclusion. The ODJFS position, however, is that HCFA is wrong, and the house is no longer exempt in this situation. The reason ODJFS takes this position, is that unless the house is removed from the revocable trust, then it will be difficult to recover the assets through estate recovery at the death of the nursing home spouse.

You tell Ward and June that, fortunately, there is a solution, although it may range from very simple to costly, depending upon what needs to be done. The answer will be to remove the house from the revocable trust. This could be something so simple as a quit-claim deed taking the house out of trust, or if Ward is totally incapacitated and has not given any powers of attorney, then it may require a court order. At least there is a solution.

June walks away shaking her head, feeling better that at least the situation can be fixed, but also wondering why someone didn't tell her about this hidden pitfall in her revocable trust.

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