Common Mistakes to Avoid When Creating a Medicaid Trust
As individuals grow older and begin to consider long-term care needs, one legal tool often used in planning is a Medicaid trust. These trusts can help protect assets while still allowing individuals to qualify for long-term care benefits through Medicaid.
The broader category of law that deals with these concerns—asset protection, long-term care, and government benefits—is known as elder law. This area of law becomes particularly important for those preparing for the high cost of nursing home care or other extended medical services.
Medicaid is a state and federally funded program that can cover these costs for eligible individuals. However, Medicaid has strict income and asset requirements. Without proper planning, a person may be forced to spend down their assets before qualifying.
That’s where a Medicaid trust becomes useful. However, setting up one of these trusts requires careful attention to detail and legal knowledge of both state and federal rules. Missteps can result in delays, disqualification, or even penalties.
At Russell Manning Law PLLC in Corpus Christi, Texas, I help clients use these legal tools with practical guidance tailored to their situations. I’ve seen the common mistakes people make when creating a Medicaid trust, and I work closely with you to help avoid them every step of the way.
Medicaid Eligibility and Asset Rules
Before creating a Medicaid trust, it’s important to understand how Medicaid evaluates assets and income. Medicaid counts almost all income and assets when determining eligibility, which means that simply giving money away or transferring ownership of property to a family member can lead to a penalty period.
A Medicaid trust, particularly an irrevocable one, is often used to remove countable assets from a person’s ownership. But timing and legal structure matter. Medicaid uses a five-year “look-back” period to examine asset transfers. If assets were transferred improperly during that time, Medicaid may assess a penalty that delays eligibility.
Misunderstanding these basic principles often leads to costly errors in Medicaid planning. Working through them with an elder law attorney helps clarify what is allowable and how to structure the trust correctly.
Timing When Setting Up a Trust
One of the most frequent mistakes is setting up a Medicaid trust too late. Because of Medicaid’s five-year look-back period, any gifts or transfers made into the trust during this window could lead to a penalty.
For example, if a person transfers their home into a trust three years before applying for Medicaid, that transfer will be penalized. Medicaid calculates the penalty by dividing the value of the transfer by the average monthly cost of nursing home care in the area.
Waiting until a medical crisis arises can result in limited options. Early planning is key. To avoid timing issues:
Begin Medicaid planning well before long-term care is expected
Work with an elder law attorney to review the look-back rules
Avoid last-minute asset transfers that could cause penalties
Texans are encouraged to begin the process early and carefully review their options to avoid preventable setbacks.
Trust Structure and Language
Another major error is using the wrong type of trust or including problematic language in the trust document. A Medicaid trust must be irrevocable in order to remove assets from a person’s countable estate. Revocable trusts don’t protect assets for Medicaid purposes because the individual still has access to the funds.
Even within irrevocable trusts, language matters. For example, if the trust allows the individual to access principal, Medicaid will still count those assets. If income from the trust goes directly to the individual, it may count toward income limits.
Texas Medicaid guidelines require very specific trust conditions to approve eligibility. Miswriting even one clause can create a serious obstacle.
Using an elder law attorney can help make sure the trust:
Meets Texas Medicaid standards
Removes access to the principal
Clearly separates the grantor and trustee roles
Protects the home while maintaining Medicaid eligibility
This isn’t an area where using a generic trust template or a non-lawyer drafting service is advisable.
Trustees and Beneficiaries
Choosing the wrong trustee or beneficiary structure can result in unnecessary complications. A trustee must be someone the grantor trusts to manage assets responsibly and follow the trust’s terms. At the same time, the trustee must not act in ways that give the grantor control or access to the assets.
Beneficiaries also must be selected with caution. If the trust structure funnels income or assets to the grantor or their spouse in a way that violates Medicaid rules, it could trigger disqualification.
An attorney often counsels clients to choose an independent trustee—someone other than the grantor or their spouse. In some cases, adult children or professional fiduciaries may be a better choice to avoid conflicts with Medicaid regulations.
Here are a few points to consider when selecting trustees and beneficiaries:
Avoid appointing yourself or your spouse as a trustee
Make sure beneficiaries are clearly identified and consistent with your estate plan
Discuss potential tax responsibilities with your attorney before finalizing trustee arrangements
Medicaid Trust Taxation
Another commonly misunderstood issue involves the taxation of Medicaid trusts. While the goal is to protect assets from being counted by Medicaid, the trust still exists as a legal entity and must follow tax laws.
Some trusts are treated as grantor trusts for tax purposes, meaning the income is taxed to the grantor even though the grantor can’t access the assets. Others require the trust to file its own tax return.
Failure to address the tax implications properly can result in missed filings, penalties, or unexpected tax burdens. Elder law isn’t just about Medicaid—it also includes protecting your overall financial picture.
Property Transfers Into the Trust
Many people transfer their primary residence into a Medicaid trust, but mistakes in this process can lead to unintended consequences. For example, if the transfer is done incorrectly, it may result in:
Loss of property tax exemptions, such as homestead or over-65 exemptions
Problems with capital gains taxes upon sale
Challenges in Medicaid qualification if the home isn’t exempt
In Texas, it’s still possible to protect your homestead and maintain certain property tax exemptions while placing it in a Medicaid trust, but only if the trust is structured carefully.
An attorney works with clients to review local property tax laws and coordinate Medicaid planning with real estate considerations. A trust should be structured to maintain favorable tax treatment wherever possible.
Gifting and Irrevocable Trusts
Some individuals make the mistake of thinking they can simply gift assets to family members to qualify for Medicaid. However, gifting without legal planning can backfire. Direct gifts made within the five-year look-back period are subject to Medicaid penalties.
An irrevocable Medicaid trust allows for gifting in a more controlled manner, but it still requires adherence to strict rules. The assets must be placed in the trust well before applying for Medicaid, and the grantor must not have access to those assets.
Texas residents considering gifting strategies should speak with an elder law attorney to understand how gifts interact with Medicaid rules. Improper gifting is one of the fastest ways to disqualify an applicant.
Record-Keeping and Annual Reviews
Another frequent mistake is treating the trust as a “set it and forget it” tool. While the trust may be legally sound at the time it’s created, circumstances change. Beneficiaries may pass away, laws may be updated, or a person’s care needs may shift.
Failing to review the trust regularly could lead to problems later. For example, if a beneficiary is no longer living or a trustee is no longer able to serve, the trust could require amendments. Medicaid rules also evolve, and what worked five years ago may no longer be valid.
Proper record-keeping is another often overlooked detail. Trustees must keep clear records of transactions, maintain separate trust accounts, and document decisions. Medicaid may request these records during the application process.
Professional Legal Help
Trying to create a Medicaid trust without legal help is another serious mistake. Misunderstanding state-specific rules or relying on online forms can result in significant setbacks.
While many people want to save money by avoiding legal fees, the cost of an improperly drafted trust often outweighs the initial savings. Disqualification from Medicaid or asset mismanagement can be far more costly in the long run.
Working with a legal professional trained in elder law, such as Attorney Russel Manning, helps individuals and families in Texas make informed, strategic decisions. Whether reviewing existing estate documents or preparing new Medicaid trusts, legal help is an essential part of the process.
Start Planning Your Medicaid Trust With Confidence
Medicaid trusts are powerful tools in elder law, but they require careful legal attention to work properly. If you live in Corpus Christi, South Texas, or the Coastal Bend area, Russell Manning Law PLLC provides tailored legal advice focused on protecting your assets while managing Medicaid eligibility. Contact me today to avoid common missteps and feel more confident about your future.