Revocable Trust and Medicaid Planning – Think Twice

Many people use a revocable trust (also known as a living trust) instead of a will to do their estate planning.  Revocable trusts are a great estate planning tool, but if you and your spouse want to include Medicaid planning in your estate plan, you might want to think twice about using a revocable trust instead of a will.

While wills and revocable trusts are both excellent estate planning tools, if you and your spouse are concerned about Medicaid, you should think twice about using a revocable trust.

Regardless of whether you use a will or a trust to do your estate planning, that document sets out how your “estate” is to be managed upon your death.  Before we go any further, we should define what we mean by an “estate.”  In Washington, your estate consists of your separate property plus one-half of you and your spouse’s community property (see my April 18, 2018 post for a discussion of community and separate property).  The other one-half of the community property and your spouse’s separate property “belongs” to your spouse.  When a couple does their estate planning with wills, each of them prepares a separate will that sets out how his or her “estate” is to be distributed after death.  If the couple uses a revocable trust for their planning, in Washington, the couple usually places all of their assets into a single trust while they are alive.  Upon the first death, the deceased spouse’s estate is distributed under the terms of the trust.  This usually means that those assets remain in the trust, but they are partitioned off into a “subtrust” for the surviving spouse.  The surviving spouse’s assets also remain in the trust.  

A common way to protect your spouse’s ability to receive Medicaid benefits after you die is to leave your estate to a special needs trust for your spouse.  A full discussion of special needs trusts is far beyond the scope of this blog post, but for our purposes a special needs trust holds assets that can be used for your spouse’s “supplemental” needs that are not paid for by Medicaid (e.g., clothing, going out to dinner or a movie with a family member, travel, etc.).   

You can establish a special needs trust for your spouse in your will or in a revocable trust, but the State of Washington treats special needs trusts in a will very differently from those established under a revocable trust.

If you establish a special needs trust for your spouse within your will, the Medicaid regulations say that the assets are not counted as belonging to your spouse when he or she is applying for Medicaid.  The assets in a trust you establish by your will do not have to be spent before your spouse can qualify for Medicaid. 

Unfortunately, the state takes a very different view on revocable trusts.  If you and your spouse establish special needs trusts for each other in your revocable trust, the trust assets can still be spent on your spouse’s supplemental needs after your death, but Washington State considers the assets as belonging to your spouse, and, therefore, the trustee will have to spend those assets before your spouse can qualify for Medicaid.  The trustee may be able to preserve some of those assets through other Medicaid planning methods, but the trust does not have the blanket protection that a properly-prepared special needs trust created under a will has.

While wills and revocable trusts are both excellent estate planning tools, if you and your spouse are concerned about Medicaid, you should think twice about using a revocable trust.