Pennsylvania Medical Assistance: Can A Testamentary Trust Help You Qualify?

Thirty five percent of the population aged 65+ will eventually enter a nursing home.  This is fact.  There is a very real chance that you or a family member will someday require Pennsylvania medical assistance.

Given the likelihood that someone you know will need a skilled nursing facility, how can you prepare?  Of course you can stay as healthy as possible for as long as possible.  But even if you remain diligent about your health, long term care is still a possibility.

Because you can live a perfectly healthy life and still require skilled nursing care, we recommend preparing financially.

The average cost of a nursing home in Pennsylvania is now over $9000.00 per month.  Even if you save and remain frugal, the cost of care is overwhelming.  Various strategies exist to defray the cost of care and make eligibility for Pennsylvania medical assistance less expensive.

Today, we will discuss one potential strategy: the testamentary trust.

What is a Testamentary Trust?

A testamentary trust is a trust created under a last will and testament.  This means the instructions for the trust are written into the will.

A testamentary trust does not take effect until after the testator dies.  This is unlike a revocable living trust, which has force during the creator’s lifetime.

A testamentary trust must also pass through probate.  This occurs because the assets going into the trust are titled only in the decedent’s name.  In other words, the assets are not jointly owned and do not include life insurance policies or IRA’s.

For a testamentary trust to be effective, assets must be re-titled into separate names (i.e. a husband and a wife).  Some people may consider this a negative aspect of the testamentary trust, but the probate process in Pennsylvania is relatively inexpensive and simple.

How Might A Testamentary Trust Help With Pennsylvania Medical Assistance?

Multiple potential planning scenarios exist.

If one spouse is already in a nursing home, the community spouse should consider creating a will that includes a testamentary trust.  If the community spouse dies first, and they have a standard will, the estate will pass to the spouse living in the nursing home.  This outcome is potentially disastrous.

The institutionalized spouse may now have excessive net worth and lose Medicaid eligibility.  Even of the only asset is the primary residence, and the institutionalized spouse maintains Pennsylvania Medicaid eligibility, once they pass away the house will likely be subject to estate recovery.  Given that most people hope to pass along the family home, opening up the possibility of estate recovery is a bad option.

However, with a testamentary trust, the idea is that the institutionalized spouse doesn’t have access to the assets.  Therefore he or she does not lose Pennsylvania medical assistance eligibility.

How Else Might A Testamentary Trust Help With Medicaid?

A testamentary trust for Pennsylvania residents may be a viable planning option even if one spouse is not in a nursing home.  If both spouses are healthy and skilled nursing care is not imminent, a testamentary trust could still be beneficial.

Under this planning solution, each spouse separately owns fifty percent of all assets.  This means that each spouse independently owns their own banking accounts and other investments.  It also means that the primary residence should be re-titled to tenants in common.  Assets must be re-titled because, if they are not, nothing will fund the testamentary trust.

How is this helpful?  After the first spouse dies, their share of the assets will then be probated and pass into the testamentary trust.  If the surviving spouse then requires nursing home care, the assets that have passed into the testamentary trust should be protected against a Medicaid spend-down.

If it is clear that one spouse is going to pass away first, the healthy spouse can transfer their half of the assets to the sick spouse.  When the sick spouse dies, all assets will go into the testamentary trust.

Is The Testamentary Trust Really A Viable Solution?

Let’s first examine the key federal law provision.

Federal regulation 42 U.S.C. §1396p(d)(2)(A) places certain restrictions on trusts established “other than by will.”  This is considered by some to treat the testamentary trust as a “safe harbor” for Pennsylvania medical assistance planning.  The logic behind the “safe harbor” provision is this: if Congress wanted to eliminate all trust planning to help people qualify for Medicaid, then they wouldn’t have left the “other than by will” exception in the statute.

Pennsylvania Code and court decisions are more complicated, however.

Judicial decisions indicate that testamentary trusts created by the spouse may not be countable by Medicaid.  Interestingly, these decisions do not discuss the above federal code.  They do, however, discuss the Pennsylvania Code, specifically §178.7(a) and §178.4(c).

Additionally, the Pennsylvania Courts examined the number of lifetime beneficiaries, whether or not the lifetime beneficiary was already a Medicaid beneficiary, and the intent of the spouse that created the testamentary trust.

In summary, we believe that the testamentary trust could be a viable Pennsylvania medical assistance planning technique.  However, this article is of a generalized nature and not intended to serve as legal advice.  We recommend contacting VA Legal Team to discuss your specific situation.