Can Medicare Take Money From a Trust?

Medicare and Medicaid serve distinct roles in healthcare. Medicare is a federal health insurance program for individuals aged 65 or older, younger people with certain disabilities, and those with End-Stage Renal Disease. Its eligibility is tied to age, disability, or specific medical conditions, not financial need or asset levels. In contrast, Medicaid is a joint federal and state program providing health coverage and long-term care assistance to low-income individuals and families. This program is needs-based, meaning income and assets are critical for eligibility. While Medicare does not “take money” from trusts for eligibility or recovery, Medicaid’s rules are different; it often considers assets within trusts when assessing eligibility for long-term care benefits and for estate recovery.

Medicare’s Relationship with Trusts

Medicare operates as an entitlement program, with eligibility earned through contributions to the Social Security system via payroll taxes. Most individuals qualify for premium-free Medicare Part A (hospital insurance) if they or their spouse paid Medicare taxes for a specified number of years. Eligibility for Medicare Part B (medical insurance) and Part D (prescription drug coverage) involves paying monthly premiums.

Because Medicare eligibility is not based on financial need, assets held in a trust do not affect enrollment or benefits. Medicare does not review an individual’s asset holdings, including trusts, to determine qualification for coverage. Consequently, Medicare does not have a mechanism to “take money” from a trust for healthcare costs or to recover funds after a beneficiary’s death. Its structure differs fundamentally from programs that consider an applicant’s financial resources.

Medicaid’s Rules for Trusts and Eligibility

Medicaid, unlike Medicare, is a needs-based program providing medical assistance for low-income individuals and families, particularly for long-term care services like nursing home or home health care. To qualify for Medicaid long-term care benefits, applicants must meet strict income and asset limits, which vary by state but commonly set individual countable assets around $2,000. These limits necessitate a thorough review of an applicant’s financial resources, including assets held in trusts.

A key concept in Medicaid eligibility is the “look-back period,” generally 60 months (five years) immediately preceding the application date for long-term care. During this period, Medicaid agencies scrutinize all financial transactions, including transfers of assets to trusts, to identify any transfers made for less than fair market value. This review prevents individuals from intentionally divesting assets to meet Medicaid’s financial thresholds.

If assets are transferred for less than fair market value within this 60-month look-back period, a “penalty period” of ineligibility for Medicaid benefits may be imposed. This period is calculated by dividing the value of the uncompensated transfer by the average monthly cost of nursing home care in the state. For example, a $100,000 transfer with an average monthly nursing home cost of $10,000 would result in a 10-month penalty. During this penalty, Medicaid would not cover care costs.

How Different Trust Types Impact Medicaid Eligibility

The type of trust significantly influences how assets within it are treated for Medicaid eligibility.

Revocable Trusts

Revocable trusts, also known as grantor trusts, offer no asset protection for Medicaid planning. Since the grantor retains the ability to modify or revoke the trust and regain access to assets, Medicaid considers these assets as still belonging to the applicant. Assets in a revocable trust are counted towards Medicaid’s asset limits, and transferring assets into such a trust does not shield them from eligibility determinations or the look-back period.

Irrevocable Trusts

Irrevocable trusts, especially Medicaid Asset Protection Trusts (MAPTs), can protect assets from being counted for Medicaid eligibility. For an irrevocable trust to be effective, the grantor must relinquish all control and access to the principal. Assets transferred to a properly established irrevocable trust are not counted as available resources for Medicaid, provided the transfer occurred outside the 60-month look-back period. Transfers within this period are subject to penalties, leading to Medicaid ineligibility.

Special Needs Trusts (SNTs)

Special Needs Trusts (SNTs), or Supplemental Needs Trusts, hold assets for individuals with disabilities without disqualifying them from means-tested government benefits like Medicaid. These trusts allow beneficiaries to have funds for supplemental needs not covered by Medicaid, such as personal care or education, without affecting eligibility. There are two primary types: first-party SNTs, funded with the disabled individual’s own assets, and third-party SNTs, funded by assets belonging to someone other than the beneficiary. First-party SNTs include a “Medicaid payback” provision, requiring reimbursement to the state for Medicaid benefits received upon the beneficiary’s death.

Medicaid Estate Recovery and Trusts

The Medicaid Estate Recovery Program (MERP) allows states to seek reimbursement for certain Medicaid long-term care costs from the estates of deceased beneficiaries. This federal mandate aims to recover funds paid for nursing facility services, home and community-based services, and related hospital and prescription drug services. A “Medicaid estate” for recovery generally includes assets that pass through probate.

Revocable Trusts and MERP

Assets held in revocable trusts are subject to Medicaid estate recovery. Because the grantor maintains control over these assets during their lifetime, they are considered part of the individual’s countable estate upon death. The state may place a claim against these assets to recover Medicaid expenditures, even if the trust was intended to avoid probate. Therefore, revocable trusts do not protect assets from MERP.

Irrevocable Trusts and MERP

Assets transferred to a properly structured irrevocable trust are generally not considered part of the deceased individual’s estate for probate purposes and are often protected from Medicaid estate recovery. If assets were transferred outside the 60-month look-back period and the grantor retained no beneficial interest or control, they are typically beyond MERP’s reach. This makes irrevocable trusts a common tool in long-term care planning to preserve assets for heirs.

Special Needs Trusts and MERP

First-party Special Needs Trusts are subject to estate recovery through their mandatory Medicaid payback provision. Any remaining funds in the trust upon the beneficiary’s death must first reimburse the state for Medicaid benefits provided. In contrast, third-party SNTs, funded by others and never owned by the beneficiary, typically do not have a Medicaid payback requirement and are exempt from estate recovery.