Before we start
Why do I need to know about the Medi-Cal 30-month lookback period? Because Income Only trusts are often used for Medicaid (in California: Medi-Cal) planning. When you apply for Medi-Cal, the look-back period begins. Any transfer of a non-exempt asset (also called “countable”) for less than fair-market value to another party within 30 months of an individual’s application for Medi-Cal for nursing facility level of care may result in a period of ineligibility (see California Department of Health Care Services). Currently in California cash or liquid assets have a 30 month look back, and real estate (other than the residence, which is an exempt asset for eligibility) has a 5 year look back. Medi-Cals’s look-back period is meant to prevent Medi-Cal applicants from giving away assets or selling them under fair market value to meet Medicaid’s asset limit. However, if California fully implements the federal Deficit Reduction Act, the lookback period may increase to a 60-months period.
What is an income only trust?
Trusts are funded with principal, and generally both principal and income can be distributed to the beneficiaries according to the trust provisions. In an income only trust distribution of principal is strictly prohibited. This arrangement prevents the sale of assets for the funding of, for example, long-term care expenses. Income could of course still be used for this purpose. However, the funds in the trust do not count towards the asset limit for Medi-Cal eligibility, but only if the trust was funded outside of the respective lookback period (see above). Also, the funds in the trust are not subject to estate recovery after the beneficiary’s death.
What are ideal assets for an income only trust?
A personal residence, a vacation home, appreciated securities, or income producing properties such as rental property or a farm are ideal properties to be placed in an income only trust. Provided the lookback period has been satisfied and the beneficiary has to go to a skilled nursing facility, only the income from the trust would be paid to the facility with Medi-Cal covering the balance.
See also: Trusts – A general overview
