The Pitfalls of Revocable Living Trusts
June and Ward Smith had worked hard all their lives. They raised two boys, Wallace and Theodore, and were settling down to a nice retirement.
Several years earlier, the Smiths had attended a workshop on living trusts and after much discussion, they established the Smith Family Living Trust. They thought this was a great idea… and they were right… until Ward’s stroke.
Ward went from the hospital to the Shady Rest Nursing Home, and June went to DHHS (i.e. South Carolina Medicaid) to learn how to pay for Ward’s care. June explained to the caseworker that their assets were rather modest and at this time, all they had left was $75,000 in CD’s and their home. Fortunately, June said she and ward had established a revocable living trust several years ago, to avoid probate and handle situations if one of them became ill. At least, they had done that right, she said. So June went ahead and applied for Medicaid.
She was shocked later to get a letter from the Medicaid authorities telling her that her home was not an exempt asset and she didn’t qualify for Medicaid. The reason, according to DHHS, is that if a home is owned by a trust, it is considered non-exempt property and it inflates the amount of countable assets the couple has. In other words, since Ward and June have $75,000 in CD’s and a $100,000 house in trust, then Medicaid says that they have total countable assets of $175,000.
And according to South Carolina law, the community spouse (i.e. June) can keep a maximum of $66,480. Since the house in trust has a value of $100,000, June could spend all of her other assets… every last penny… keep only the house, in trust, and still not qualify for Medicaid. That’s because, as long as the house is in the trust, it is not an exempt asset, and since its value is more than $66,480 in this case, she cannot qualify Ward for Medicaid as long as the house remains in the trust.
It bears noting that the Medicaid position on this matter is incorrect. In fact, the Health Care Financing Administration specifically states in HCFA Transmittal Number 64 that placing non-countable assets in a revocable trust does not affect the exclusion. The DHHS position, however, is that the HCFA is wrong, and the house is no longer exempt in this situation. The reason DHHS takes this position is that it will be difficult to recover the assets through estate recovery at the death of the nursing home spouse unless the house is removed from the living trust.
We tell Warn and June that fortunately, there is a solution; although it may range from very simple to costly, depending on what needs to be done. The answer will be to remove the house from the revocable trust. This could be something as simple as a quitclaim deed taking the house out of the trust, or if Ward is totally incapacitated and has not given any powers of attorney, then it may require a court order. At least there is a solution.
June walks away, shaking her head, feeling better that at least the situation can be fixed, but also wondering why someone didn’t tell her about this hidden pitfall in her living trust.
Elder Law Today is written by Greenville Attorney, Jackson E. Fields, Jr., Attorney at Law. This newsletter is published as a service of the Fields Law Firm, P.A. This information is for general informational purposes only and does not constitute legal advice.
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