The Listen to Lawrence Letter: What to do with Medicaid trust income

CLIENT QUESTION:

We have a Medicaid Irrevocable trust with you. We are thinking of selling our house, and we understand that the proceeds from the sale go back into the trust. We understand that we could use those proceeds and purchase another home which would stay within the trust.

Our question is, could we invest the proceeds from the house into, say a CD, and use the monthly interest we received from the CD as a rent payment on an apartment rather than purchasing a new home?

MY RESPONSE:

I understand that what you want is flexibility with these Medicaid trusts. Who wouldn’t?  You successfully saved your house from the cost of future long-term care expenses (after the five-year lookback), but situations change over time. You correctly pointed out that the trust could sell this house and buy another for you. You also know that you cannot get trust assets back in your name because if you can get the assets, then Medicaid can get the assets.

However, your question goes to income, and not assets.

If you sell the house and put the money in a bank or brokerage account, then the trust will have income (interest or dividends). Who gets that income? The answer lies in the trust language. If the trust says that you retained the right to the income, then you get the income. If the trust says that the trust keeps the income or allows it to be paid to your children (or other beneficiaries), then the trust or your children get the income. But note that if the trust says you get the income, then Medicaid would get the income! For that reason, we rarely create a trust where the income would be paid back to you.  Most clients want to protect their income as well as their assets.

The lesson is simple: selling a house held in a Medicaid trust doesn’t create a problem, but what happens to the sale proceeds and any future income depends entirely on how your trust was drafted.

So, the answer to your question is found in your trust, and it probably says you cannot receive the income from the CD.  If so, there are alternatives, but they vary from case to case.

I hope this helps!