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Monday, June 24, 2019

Mass Health and Testamentary Trusts

In order to qualify for Mass Health, individuals must have no more than $2,000 in assets.  Oftentimes this leads to people panicking and trying to spend or hide all of their money and assets.  Irrevocable trusts are a great tool to protect assets for Mass Health eligibility, however Mass Health has a very strict five year look back period, meaning any transfer of assets must have occurred more than five years prior to eligibility.  Unfortunately, many people do not plan far enough in advance (or there is an unexpected injury or illness at a young age) and the five year period is devastating on the healthy spouse's financial future.  There is a strategy that can avoid heartache in the future.

Most spouses have estate plans which are setup so that if one spouse passes away, everything directly passes to the surviving spouse.  This is often done through wills or trusts, but also by having both spouses jointly own all major assets such as the family home or bank accounts.  However, any asset that passes from one spouse to another automatically or directly through a will or trust will be counted as an asset towards the surviving spouse's eligibility for Mass Health.  

While most couples have wills or revocable trusts leaving everything for the benefit of the surviving spouse, this plan will not work if the surviving spouse is incapacitated, is receiving Medicaid nursing home benefits, or may need nursing home care in the future.  If a spouse’s will leaves everything to the other spouse, when the first spouse dies, all of the assets will likely be exposed to Medicaid.  

There is a simple way to avoid this issue, but it needs to be handled properly to be effective.  Under the Medicaid rules, a trust created by a will (which is commonly referred to as a “testamentary trust”) is NOT considered in determining whether the surviving spouse is eligible for Medicaid benefits.  If you have $20,000 in assets that is transferred by a will directly to a surviving spouse, these assets will preclude Mass Health eligibility.  If these assets are left in a testamentary trust for the benefit of the surviving spouse and are funded through probate, these same assets will not be considered against Mass Health eligibility.

In order for this estate plan to work, assets must be redistributed in order to take full advantage of the testamentary trust protection.  For example, it the family home may have to be re-deeded from joint tenancy to tenants in common and then each spouses' share in the home would be left in a testamentary trust for the benefit of the surviving spouse.  While this sounds complicated and does mean the house would have to go through probate (as opposed to automatically transferring full ownership to the surviving spouse), the protection of the asset is much stronger this way.  While many people would do anything to avoid the costs of probate, the costs associated with probate are relatively small when compared to protecting an entire estate from Medicaid.     

Unlike a typical Medicaid protection trust, the funds held in a testamentary trust can be used to pay for anything the surviving spouse requires.  However, if the surviving spouse applies for Medicaid, the testamentary trust assets cannot be attached by the Commonwealth.  As an added incentive, when the surviving spouse passes away, the assets remaining in the testamentary trust can pass to the children, without any recourse by Medicaid.

One concern many clients have is what to do if one spouse has been told they are ill and will likely not survive another five years (i.e. the Medicaid look back period).  It is important to note that transfers between spouses do not fall under the five year look back rule. 

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