The Listen to Lawrence Letter: Can the trustee use money in an Irrevocable Medicaid Trust to pay taxes?
December 7, 2021
Dear Clients and Friends,
Sometimes I talk and expect everyone to LISTEN TO LAWRENCE, but sometimes my message isn’t getting through. I get it, it’s complicated. But I need you all to get it, so I will repeat this message as often as I have to. So check out today’s question and my response.
Assume there are monies in our irrevocable Medicaid trust in the form of a certificate of deposit (CD). It is my understanding that the trustee can open a regular checking account in which the trustee is the sole owner and have the monthly interest from the CD transferred to the checking account. The trustee can then use the $$ in the checking account to pay property taxes and/or the homeowner’s annual insurance premiums for a property that is in the trust. Correct?
NO, NO, NO! Unless the trust specifically says that all trust income can or may be paid back to you or spent on your behalf (which is rare in my trusts), then the trustee absolutely CANNOT pay the income out to you; nor in such cases can the trustee pay one of your bills, such as your property taxes or insurance premiums. These bills should be paid from your income and assets outside the trust.
My trusts usually state that you retain the use and occupancy of the property in the trust, which comes with the obligation to pay the taxes and insurance. I have you retain the use and occupancy so that you may keep all of your property tax exemptions, which can add up over time. Since you are responsible for the taxes and insurance, the trustee CANNOT pay them. If the trustee did pay them in such circumstances, the trust would no longer work to protect your assets from Medicaid. On the other hand, if the trust says that you have retained the right to all the income in the trust, then the income can be paid to you or pay your bills (again, this is rare in my trusts).
This analysis is probably limited to your principal residence inside the trust. The trust may properly pay the expenses on real estate that the trust owns and which you have no legal obligation to pay.
The bottom line is that I usually do not have you retain the right to the trust income because if you ever needed Medicaid, then you would lose all trust income. If you can get it, Medicaid can get it. But if my trust says that you are not entitled to the income, then no income should come out of the trust to pay one of your bills, especially the taxes and insurance on your principal residence. I hope this is now crystal clear!
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Until next time…
peace, health and happiness,
Lawrence Eric Davidow