Trust Me, But Not in the Third Circuit

This is the fourth of five columns describing strategies to protect the financial security of married persons whose spouses are in nursing care.  This column and the other three each explain the pros and cons of one plan, how it works, and in what states it is available. This column discusses irrevocable sole-benefit trusts.

In the first post, we met Sam and Hazel.  Sam recently became a nursing home resident and will not be returning home.  His monthly nursing home bill is $8,000, far above their combined income.  They have a homestead worth $200,000 (even at today’s depressed home values) and $200,000 in savings.  This puts Sam and Hazel well above median household net worth of around $180,000, but spending $8,000 a month just for Sam’s care will deplete their savings rapidly.

The Medicaid agency tells Hazel that their home is not counted and Sam could be eligible for Medicaid when half of their savings has been expended on his care.  Hazel would like to know if there is an alternative plan that would allow her to keep more of their savings.

A way to preserve more assets is to convert liquid assets into an income stream.  If money is put into an irrevocable trust, it may be unavailable to the person creating and funding the trust depending on the terms of the trust.  By locking the money up in a properly-drafted trust and giving the community spouse only a monthly payment, the excess assets become an income stream.  Federal Medicaid law protects the community spouse’s income, so that the excess assets become a protected income stream.

This works because of the “sole-benefit” rule.  Assets transferred to the individual’s spouse or to another – such as a trustee – for the sole benefit of the individual’s spouse do not make the institutionalized spouse ineligible for benefits.  42 USCA § 1396p(c)(2)(B).  Furthermore, the income of the community spouse is not counted as available to the spouse in the nursing home.  42 USCA § 1396r-5(b)(1).

Since sole-benefit trusts are enshrined in federal law, they can be used to protect assets in many states.  The states covered by the U.S. Third Circuit Court of Appeals are a notable exception.  According to that court, “Once the community spouse receives [irrevocable trust] payments, there is nothing preventing her or him from sharing them with the institutionalized spouse as well.”  Johnson v. Guhl, 357 F.3d 403, 408 (3d Cir. 2004).  Therefore, sole-benefit trusts cannot be used in Pennsylvania, New Jersey, Delaware and the Virgin Islands.

Surprisingly, the same court laid down contradictory law in 2008.  In James v. Richman, the court stated that requiring the community spouse to share would undermine the rule that “no income of the community spouse shall be deemed available to the institutionalized spouse.” James v. Richman, 547 F.3d 214, 219 (3rd Cir. 2008).

For more information about these Medicaid devices, or for a referral to an Elder Law attorney in your state, please call either of the numbers below or visit my website and click on the “contact” button.


John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
©2011 John B. Payne, Attorney

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