05 May 5 REQUIRED GOVERNMENT REIMBURSEMENT PROVISIONS IN ADDITION TO PROBATE
There are numerous Medicaid programs that require a pay-back of governmental benefits advanced after the death of the Medicaid recipient. This is most common is if the will of the deceased is probated or under the laws of intestacy (when the Medicaid recipient doesn’t have a will or there is no beneficiary designation of a resource). Therefore, it is common to avoid Medicaid estate recovery (the government pay-back) by avoiding probate (i.e., Ladybird and Transfer on Death deeds whereby real estate passes by deed at death instead of by will or intestacy, or by beneficiary designations on a car, life insurance policy, IRAs and even a paid-on death designation on the Medicaid recipient’s checking account).
However, there is a necessity for government pay-back to the extent of Medicaid benefits advanced under law in certain cases even if probate is avoided as follows:
- Medicaid-Compliant Annuities
A Medicaid compliant annuity is often used to change countable resources (Medicaid is “means-tested”) into an income stream to achieve governmental assistance for long-term care Medicaid (i.e., nursing home care).
One example of the use of a Medicaid-compliant annuity is if the gross combined non-countable resource income (i.e., Social Security) of a married couple is too great ($3948 per month in year 2025) to keep all countable resources without a spenddown (there is a countable resource limit which varies on the facts). The well spouse (known as the community spouse) could purchase a Medicaid-compliant annuity in that spouse’s name to change countable resources into an income stream.
Another use of Medicaid-complaint annuities is if the applicant is single, then a Medicaid applicant could buy this type of annuity and make a gift whereby the annuity expires at the same time as a transfer penalty (long-term care Medicaid presumes uncompensated transfers within 5 years were purposefully done to obtain eligibility – but that doesn’t mean there is a 5-year penalty). This planning strategy often saves over 50% of the countable assets.
Finally, if the Medicaid applicant applies for a waiver program (i.e., Star+) and his or her income is well below the monthly income cap (presently $2901 per month) and the applicant has excess countable resources, then the annuity could be used to help pay bills and extra care since the applicant may use the income up to the cap.
A Medicaid-compliant annuity does require a pay-back to the government to the extent Medicaid benefits were advanced. As a result, age and health and the length of the annuity are considered before purchase.
- Qualified Income (“Miller”) Trusts
Long-term care Medicaid has an income limit for eligibility ($2901 per month), but income eligibility can be achieved with a Qualified Income Trust whereby the applicant’s income (not assets) is placed into the trust monthly. It can also be used for the Star Plus and PACE Medicaid programs. If the Medicaid recipient is in a nursing home, then the income should go in and out of the trust each month (either to the nursing home or the community spouse or both depending on the community spouse’s income). However, upon the Medicaid recipient’s death if there is anything left in the trust, the beneficiary is the government.
- Self-settled (1st party) Special Needs Trusts
When a single person is under age 65 and is disabled and has countable resources (certain resources such as a home and a car are non-countable) over the limit (more than $2000), the disabled person, his or her parent, grandparent, guardian or the Court, can establish a Self-Settled (also called First Party) Special Needs Trust so the assets will not count as a resource for Medicaid (typically Supplemental Security Income). This typically occurs when the disabled person receives an inheritance or gets a settlement from a personal injury accident or child support in a divorce. This type of trust also requires a pay-back provision unlike third-party special needs trusts (someone else’s funds are used to fund the trust) unless the third-party trust requires a pay-back (which would be a drafting error). The pay-back provision covers all benefits advanced by the government during the lifetime of the beneficiary.
- Pooled Trusts
A pooled trust is similar to a special needs trust. The difference is many persons join a master trust and fund a trust subaccount that is pooled. The pooled funds are managed by a professional trustee. The most common pooled trust in Texas is The Arc of Texas Master Pooled Trust. At death, either the state can be repaid or it can be retained by the trust. After benefits paid by the state are reimbursed to the state first to the extent government benefits were advanced, then others can receive similar to a special needs trust.
- ABLE Accounts
ABLE (Achieving a Better Life Experience) accounts up to $100,000 do not count as a resource for Medicaid. This type of account is available for those who become disabled before age 26 (the age will be going up to 46 on January 1, 2026). The maximum that can be contributed annually to this type of account is equal to the annual gift tax exclusion which is presently $19,000 in year 2025. ABLE accounts are more flexible in how the money is spent (i.e., shelter, including utilities) without a reduction in Supplemental Security Income. ABLE accounts pay-back provision differs in that only the amount of benefits received after the establishment of the account can be reimbursed from the ABLE account. Also, it could be used for funeral expenses unlike a Self-Settled Special Needs Trust or a Pooled Trust.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.