Does naming a beneficiary eliminate the need for a trust?

Naming beneficiaries on your bank and investment accounts does not, by itself, protect those assets from Medicaid rules, according to elder law attorney Harry Margolis, author of "Get Your Ducks in a Row." 

The confusion, he explained in a recent interview and in his AskHarry.info column, comes from mixing up two separate concepts: Medicaid eligibility and Medicaid estate recovery.

To qualify for Medicaid, most applicants must first reduce their countable assets to about $2,000. Nearly all assets other than a primary residence count toward that limit. 

Simply adding beneficiaries to checking, savings, or investment accounts does not change ownership, meaning those assets still count and must generally be spent down before Medicaid coverage begins. As a result, beneficiary designations do nothing to help with eligibility in most states.

Estate recovery is a separate issue. After a Medicaid recipient dies, states are required to seek repayment for the cost of care from the recipient’s estate.

What follows is an edited transcript of the conversation Margolis on the topic, revised for clarity and brevity.

Robert Powell: If you name a beneficiary on your investment accounts, do you still need to fund a trust, since Medicaid can’t come after your estate anyway? Here to talk with me about that is Harry Margolis, author of "Get Your Ducks in a Row." Harry, welcome.

Harry Margolis: Good to see you again, Bob.

Robert Powell: I understand this is a question you received on Ask Harry. I’m curious about your answer.

Why beneficiary designations don’t solve the Medicaid problem

Harry Margolis: The person who wrote in was really confusing a couple of different issues.

In most cases, you can’t qualify for Medicaid until you’ve spent down to about $2,000. So the idea that you can protect investment accounts simply by naming a beneficiary doesn’t really work, because you’re going to have to spend those assets down anyway before Medicaid kicks in. There’s nothing to protect at that point.

If the person is married, the spouse of a nursing home resident can keep roughly $160,000. That amount increases every year with inflation. Depending on the state, the spouse may also be able to keep retirement accounts above and beyond that limit.

So they may have named a beneficiary on an investment or retirement account, which would avoid probate and avoid estate recovery. But they haven’t qualified for Medicaid yet anyway.

What Medicaid estate recovery actually targets

Spouses are not subject to estate recovery. And it’s worth explaining what estate recovery is.

Medicaid will pay for nursing home care and, in some cases, assisted living or home care. Once you qualify – meaning you’re down to $2,000 in countable assets, you may still have a home, and if you’re married, your spouse can retain assets – the state is obligated to seek recovery after your death for what it spent on your care.

Typically, the only asset subject to that claim is the home. That’s because it’s usually the only substantial asset you’re allowed to keep while receiving Medicaid.

So when we talk about Medicaid planning and estate recovery, we’re usually talking about protecting the home, not investment assets, as this writer suggested.

Probate vs. non-probate property

Only the Medicaid recipient’s estate is subject to recovery. The spouse’s estate is not.

Whether a home is subject to recovery depends on state law. Some states limit recovery to probate property, while others extend recovery to non-probate property.

Probate property is property held solely in your name. Non-probate property passes at death through mechanisms such as a life estate, a beneficiary designation, or a trust.

So the better question is not how to protect investment accounts, but how to protect the home.

Trusts, life estates, and state-by-state differences

In some states, naming a beneficiary for a home through a transfer-on-death deed may work. But not all states allow those.

Life estates are another option and are widely available. Trusts are also commonly used. Some states recognize Lady Bird deeds, which are a form of life estate that allows the owner to retain more control.

Whether these non-trust options actually protect the home from estate recovery depends entirely on how a particular state applies its recovery rules. This is very much a state-by-state issue.

The five-year look-back rule

Robert Powell: My understanding is that transferring assets into a trust makes you ineligible for Medicaid for up to five years because of the look-back period.

Harry Margolis: That’s right. When you apply for Medicaid, you have to report every transfer you made during the prior five years.

They impose a period of ineligibility based on the value of what you transferred. While the penalty period might be shorter than five years, for practical purposes you should assume that if you make a transfer, you need to wait five years before applying for Medicaid.

Why many people protect the home, not cash

Robert Powell: Does it make sense to use a trust for the home, but not for liquid savings and investment accounts?

Harry Margolis: In most cases, that’s what people do.

The house often has sentimental value, and people want to protect it more than cash or investments, which are fungible. The house is also much less liquid. You can borrow against it, but there are costs and complications.

What people often do is protect the home through a trust or life estate, while leaving other assets available to live on and to pay for care. That way, they maintain flexibility while still protecting the house.

Putting everything into a trust can leave you financially constrained, which can make life harder for you and your family.

Why professional advice matters

Robert Powell: It’s striking how many people want to avoid Medicaid estate recovery, even though the rules are complicated.

Harry Margolis: They are complicated, and you really need to work with a qualified estate planning attorney.

You don’t want Medicaid to be your only option. You often need cash to pay for home care or to transition into a better facility. If everything is tied up in a trust, that lack of flexibility can be a real problem.

Related: Should you remove a spouse with dementia from the deed?