Most estate planning is designed to avoid probate.
We use living trusts (both revocable and irrevocable), coupled with transfer-on-death arrangements, jointly owned property, and coordinated asset titling so that assets can pass efficiently at death without becoming trapped in a court-supervised probate proceeding.
A Medicaid-Style Will is one of the rare exceptions.
It is used when one spouse is receiving or likely going to be receiving Medicaid long-term care benefits and there is always a concern that the healthier spouse might die first. Instead of leaving assets directly to the Medicaid spouse — or allowing them to pass automatically outside probate— the healthier spouse’s assets pass through probate into a testamentary special needs trust for the Medicaid spouse.
In this situation, probate is not a planning failure. Probate is the mechanism that makes the Medicaid protection possible.
The Risk When the Healthier Spouse Dies First
Consider a married couple in which one spouse is receiving Medicaid coverage for nursing-home care or Medicaid-funded home and community-based services.
The healthier spouse remains in the community and owns the couple’s remaining savings, investments, residence, or other property. Good Medicaid Planning permitted the healthier spouse to retain all of those assets while the Medicaid spouse qualified for benefits.
But those protections do not answer the next question:
What happens if the healthier spouse dies first? You just never know when this might happen, and it happens more often than you’d think, especially because the “healthier” spouse often wasn’t really that healthy to begin with, and the stress of caregiving is enormous.
Without specialized planning, the healthier spouse’s assets may pass directly to the Medicaid spouse through:
- Joint ownership;
- Payable-on-death or transfer-on-death designations;
- Retirement-account beneficiary designations;
- Life-insurance beneficiary designations;
- A revocable living trust;
- An ordinary Will leaving everything outright to the surviving spouse;
- Intestacy if there is no valid Will.
An outright inheritance received by the Medicaid spouse ordinarily becomes an available resource. If the inheritance places the surviving spouse over Medicaid’s resource limit, Medicaid eligibility can be lost until the excess assets have been spent down or otherwise protected through whatever planning options remain available at that time.
That result can be financially devastating. The family may be forced to use the inheritance to pay privately for care that Medicaid had been covering.
A Medicaid-Style Will is designed to prevent that outcome.
What Is a Medicaid-Style Will?
“Medicaid-Style Will” is a planning term, not the formal name of a document created by statute.
It is a Last Will and Testament drafted for the healthier spouse when the other spouse is receiving Medicaid or is likely to require Medicaid long-term care benefits in the near future.
Rather than leaving assets outright to the surviving spouse, the Will directs the deceased spouse’s probate estate into a testamentary special needs trust for the surviving spouse.
“Testamentary” means that the trust is created under the Last Will and Testament and comes into existence at death.
The surviving Medicaid spouse is the beneficiary of the trust, but does not own the trust assets and does not have an unrestricted right to demand distributions. An independent trustee manages the trust and makes distributions under carefully drafted standards designed to supplement, rather than replace, Medicaid benefits.
The trust can provide substantial benefits to the surviving Medicaid spouse while still preserving the Medicaid program as the primary source of payment for covered long-term care services.
Why the Trust Must Be Created by the Will
The distinction between a testamentary trust and a revocable living trust is critical.
Federal Medicaid law imposes stringent rules on trusts established with an applicant’s or beneficiary’s own assets. Under 42 U.S.C. § 1396p(d)(2)(A), an individual is treated as having established a trust when the individual’s assets were used to form the trust “other than by will.”
Those final three words — “other than by will” — create the opening used by a Medicaid-Style Will.
The healthier spouse’s Will establishes a third-party testamentary trust for the surviving Medicaid spouse. The trust is funded with the deceased spouse’s property through the probate estate. It is not a self-settled trust created by the Medicaid spouse with the Medicaid spouse’s own assets.
That distinction is why merely placing the healthier spouse’s assets into an ordinary revocable living trust does not accomplish the same objective. A trust created during life is not a testamentary trust. Assets passing from a revocable trust at death do not pass under the Will merely because the trust contains language benefiting the surviving spouse.
The protected trust must be created under the Will and funded through the probate estate.
Why Probate Is Required
A Will controls only probate assets.
It does not control property that passes automatically by contract, beneficiary designation, survivorship ownership, or another nonprobate transfer mechanism.
Therefore, the Medicaid-Style Will works only if the healthier spouse owns assets that will actually pass through probate.
That usually requires deliberate coordination of asset ownership and beneficiary designations.
Assets intended to fund the testamentary special needs trust ordinarily must not pass directly to the Medicaid spouse through:
- Joint tenancy with survivorship;
- Tenancy by the entirety;
- Transfer-on-death registration;
- Payable-on-death designation;
- A direct beneficiary designation;
- A revocable living trust;
- Any other arrangement that bypasses the Will.
Instead, those assets must be payable to the healthier spouse’s estate or otherwise remain probate assets so the Will can direct them into the testamentary trust.
This is the reverse of conventional estate planning.
For most clients, we review every asset and ask: How do we keep this out of probate?
For a married couple using a Medicaid-Style Will, we must instead ask: Which assets must pass through probate so they reach the testamentary special needs trust rather than the Medicaid spouse outright?
Probate Is Not the Goal — Preserving Medicaid Is the Goal
Probate has real disadvantages.
Depending on the jurisdiction and the nature of the estate, probate can involve:
- Court filings;
- Qualification of a personal representative;
- Probate fees and other expenses;
- Creditor-notice procedures;
- Inventories and accountings;
- Delays in administering and distributing assets;
- Publicly accessible records;
- Additional legal and administrative work.
Those disadvantages are why most of modern estate planning is designed to avoid probate, including most of the estate planning we do here at the Farr Law Firm.
But probate avoidance is not the highest objective in every estate plan.
When the surviving spouse is receiving Medicaid-funded long-term care, preserving Medicaid eligibility can be worth hundreds of thousands of dollars. The cost and inconvenience of probate are usually minor compared with the cost of losing Medicaid and returning to private payment for nursing-home care or other long-term services and supports.
The planning calculation is not close.
A family should not sacrifice Medicaid eligibility merely to avoid probate paperwork, probate fees, or administrative delay.
In this narrow setting, the benefits of preserving Medicaid heavily outweigh the disadvantages of probate.
Why Assets Cannot Simply Pass to the Children
The healthier spouse cannot solve the problem by disinheriting the Medicaid spouse and leaving the estate directly to the children.
This is because in almost every state (including Virginia, Maryland, and Washington, DC) the Medicaid spouse has legally enforceable inheritance rights in the deceased spouse’s estate. Depending on the jurisdiction, those rights may include an elective share, augmented-estate claim, intestate share, family allowance, exempt-property allowance, or other statutory entitlement.
Medicaid does not permit the surviving spouse to ignore those rights. On the contrary, Medicaid requires that the surviving spouse assert all inheritance rights to which the surviving spouse is entitled.
Federal and state Medicaid rules treat assets as transferred for less than fair market value when a Medicaid applicant or recipient takes action — or fails to take required action — to prevent receipt of property to which the individual is legally entitled. Virginia, Maryland, and DC law expressly provide that a Medicaid recipient’s failure to claim inheritance rights is treated as an uncompensated transfer.
Accordingly, a Will signed by the healthy spouse that simply leaves everything to the children creates two bad alternatives.
- The Medicaid spouse (or an agent or guardian) could assert the applicable spousal inheritance rights and receive the assets outright, but those assets would exceed the Medicaid resource limit and terminate eligibility; or
- The Medicaid spouse (or an agent or guardian) could decline to pursue those rights, whereupon Medicaid will treat that failure as a gift / uncompensated transfer by the Medicaid spouse. The resulting transfer penalty would suspend or terminate Medicaid payment for nursing-facility or waiver services for a length of time depending upon the amount of the unclaimed assets, or sometimes in perpetuity because the state can’t acccurately calculate the total amount of unclaimed assets.
This is why outright disinheritance is not the solution.
The healthier spouse’s Will must satisfy the Medicaid spouse’s inheritance rights through a properly drafted testamentary special needs trust. The spouse receives the benefit of the inheritance in the legally protected form created by the Will, rather than receiving the property outright or being forced to surrender a claim in favor of the children.
The precise elective-share and Medicaid consequences differ among Virginia, Maryland, and Washington, DC. The Will must therefore be coordinated with the applicable jurisdiction’s spousal-rights statutes, Medicaid transfer rules, and probate procedures. But the central principle is the same: leaving everything directly to the children does not avoid the Medicaid problem. It can create the very transfer penalty the plan is intended to prevent.
How the Testamentary Special Needs Trust Can Help the Medicaid Spouse
The testamentary trust is designed to improve the surviving spouse’s quality of life without giving the spouse unrestricted ownership or control over the trust assets.
Depending on the surviving spouse’s needs, the trustee may be able to use trust assets for items and services such as:
- Dental care not adequately covered by Medicaid;
- Hearing aids;
- Eyeglasses;
- Clothing;
- Furniture;
- Electronics;
- A television, computer, tablet, or telephone;
- Streaming services;
- Cellular service;
- Transportation;
- Companion services;
- Private caregivers beyond Medicaid-covered hours;
- Care-management and advocacy services;
- Entertainment;
- Travel;
- Personal items;
- A private room or enhanced residential arrangements when properly coordinated;
- Other goods and services that improve comfort, dignity, safety, or quality of life.
The testamentary special needs trust is not simply a device for holding money away from Medicaid. It is a management structure intended to preserve resources for needs Medicaid does not fully cover.
The distribution provisions must be drafted carefully. A trust that gives the Medicaid spouse an unrestricted right to receive distributions or compel distributions can be treated as an available resource. And the surviving spouse must not serve as trustee of the trust.
This Is a Third-Party Trust, Not a Medicaid Payback Trust
A testamentary special needs trust funded entirely with the deceased spouse’s assets is a type of third-party special needs trust.
That matters because it is different from a first-party special needs trust funded with assets belonging to the Medicaid beneficiary.
Federal law permits certain first-party special needs trusts under 42 U.S.C. § 1396p(d)(4), but those trusts are subject to the strict statutory requirement to reimburse the state Medicaid program from assets remaining at the beneficiary’s death before any remaining trust funds can pass to desired beneficiaries.
A properly structured third-party testamentary trust is not established with the Medicaid spouse’s own assets. It therefore does not require the same statutory Medicaid payback provision applicable to a first-party special needs trust.
After the Medicaid spouse dies, the remaining trust assets can pass to children, other family members, charities, or other beneficiaries selected by the healthier spouse and written into the trust’s terms.
This is one of the most important benefits of planning before the healthier spouse dies. The healthier spouse can preserve the assets for the surviving spouse during life and preserve any remainder for the family after the surviving spouse’s death.
The Will Alone Is Not Enough
Executing a Medicaid-Style Will without coordinating asset ownership is incomplete planning.
The Will cannot protect an asset that never reaches the Will.
For example, assume the healthier spouse signs a Medicaid-Style Will creating a testamentary special needs trust but continues to own the residence jointly with the Medicaid spouse with survivorship rights. When the healthier spouse dies, the residence passes automatically to the Medicaid spouse. It does not pass under the Will and does not enter the testamentary trust.
The same problem arises if the Medicaid spouse remains the direct beneficiary of a life-insurance policy, annuity, retirement account, payable-on-death account, or transfer-on-death account.
A complete plan requires an asset-by-asset review addressing:
- How each asset is titled;
- Whether the asset has a beneficiary designation;
- Whether the asset will pass through probate;
- Whether the beneficiary designation should name the estate;
- Whether tax considerations require different treatment;
- Whether the asset can lawfully and efficiently fund the testamentary trust;
- Whether the surviving spouse has statutory inheritance rights that could affect the plan.
The Will and the asset structure must work together.
When a Medicaid-Style Will Must Be Considered
This planning must be considered when:
- One spouse is already receiving Medicaid long-term care benefits;
- One spouse is in a nursing home and likely to apply for Medicaid;
- One spouse is receiving Medicaid-funded home and community-based services;
- One spouse has dementia, Parkinson’s disease, a stroke-related disability, or another condition likely to require long-term care;
- The healthier spouse owns assets that would cause the ill spouse to exceed Medicaid’s resource limit if inherited outright;
- The healthier spouse wants remaining assets available for the ill spouse’s benefit without requiring those assets to be spent entirely on care;
- The healthier spouse wants unused trust assets to pass to children or other remainder beneficiaries after both spouses have died.
- Both spouses are unhealthy and it’s not clear who might need nursing home level care and Medicaid first, in which case we do Medicaid-style wills for both spouses and wait to do the retitling of assets until a later date, or retitle assets to one spouse with the understanding that we may have to reverse course if the health of that spouse deteriorates faster than the other spouse.
The Medicaid-Style Will Must Be Part of a Coordinated Plan
A Medicaid-Style Will is not a document that should be signed and placed on a shelf without further action.
The complete plan requires coordination among:
- The Will;
- The testamentary special needs trust provisions;
- The healthier spouse’s revocable trust, if any;
- Real-estate ownership;
- Bank and brokerage accounts;
- Retirement accounts;
- Life insurance;
- Annuities;
- Payable-on-death and transfer-on-death designations;
- Powers of attorney;
- Medicaid eligibility rules;
- Spousal elective-share rights;
- Probate administration;
- Tax planning.
The plan must also be reviewed after major changes in assets, health, residence, marital status, beneficiary designations, or Medicaid law.
A single incorrect beneficiary designation can cause a substantial asset to pass directly to the Medicaid spouse and undo the intended protection.
Bottom Line
Avoiding probate is an important estate-planning objective, but it is not an absolute rule.
When one spouse is receiving Medicaid and the healthier spouse dies first, automatic probate avoidance can produce the worst possible result: an outright inheritance that terminates Medicaid eligibility and must be spent on long-term care.
A Medicaid-Style Will deliberately sends the healthier spouse’s assets through probate into a testamentary special needs trust for the surviving Medicaid spouse.
Probate is required because the Will cannot control nonprobate assets. The probate process creates and funds the protected testamentary trust. Although probate carries costs, delay, and administrative requirements, those disadvantages are usually insignificant compared with the cost of losing Medicaid-funded long-term care.
This is one of the rare situations in which probate is not merely acceptable. It is an essential part of the plan.