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A Better Partnership


Aug 2012
August 01, 2012

Estate Planning Tip: Testamentary Trusts

Testamentary Trusts – Significant Medicaid Protection Without Divestment

Significant Risk for Couple with Spouse Who Does Not Yet Need Care
Picture a married couple with one healthy spouse and one spouse who suffers from a condition such as Alzeimer’s, MS or Parkinson’s but has not yet advanced to the point that care outside the home is necessary. The fact that the ill spouse can continue to live at home may be largely because the other spouse is able to provide substantial care. The risk in this situation is that if the caregiver spouse were to die first, the ill spouse might suddenly have no reasonable alternative to nursing home care and the couple’s assets would be subject to depletion at the $85,000 average annual cost of nursing home care.

Medicaid Protection With No Divestment Penalty
The couple can protect against this scenario without incurring any divestment penalties by having the community spouse establish a discretionary testamentary trust in his or her will for the benefit of the ill spouse. This is a trust authorized under both federal law and Michigan Medicaid regulations as an exempt asset for Medicaid qualification purposes. Transfers to the trust upon death are not considered divestment and do not result in a penalty. The caregiver spouse might also consider establishing a revocable trust to hold assets during lifetime that pours to a testamentary trust upon death to avoid probate.

Disadvantage – Access to Funds Only Through a Trustee
Before establishing such a trust, the couple should consider that the ill spouse will not have unfettered access to the trust assets after death of the caregiver spouse.  Use of the trust assets has to be approved by the trustee. Therefore, careful selection of a trustee is critical. Trustee removal and appointment powers should also be considered.

Provides More Care Options, Not Just Medicaid
Using a testamentary trust does not relegate the ill spouse to a Medicaid nursing home. The trust assets can be used to pay for any type of care, including in-home care, assisted living, paying for services and arrangements not covered by Medicaid or paying for nursing home care in a completely non-Medicaid setting. However, having the assets held by a testamentary trust can provide Medicaid qualification and access to Medicaid programs that provide care in non-nursing home settings, giving the ill spouse more resources and more options to deal with care needs. In fact, couples without an immediate health problem may want to consider structuring their estate plans to include testamentary trusts to provide greater asset protection and resource qualification benefits to the surviving spouse. 


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