Kentucky Medicaid Asset Protection Trusts

A revocable trust protects nothing

If you keep the power to revoke a trust and take the assets back, the law treats those assets as remaining yours. They stay countable for Medicaid and reachable by creditors. KRS 386B.5-020(7)(a) states that where a person creates a trust for their own benefit with a restraint on alienation, their interest is nonetheless subject to alienation by operation of law or legal process. A revocable living trust is an excellent probate tool and provides no long-term care protection whatever.

How the Trust Is Structured

Irrevocable, income-only terms

Drafted so that principal cannot be distributed to you under any circumstances, which is the requirement that matters for eligibility, while income may be paid to you.

A trustee who is not you

Usually an adult child or another trusted person. You cannot serve as trustee of your own asset protection trust and retain the protection.

The right to live in the home

The trust is drafted so you may continue to occupy the residence for life, which is what makes families comfortable transferring it in the first place.

A retained power of appointment

A limited power to change who ultimately receives the remainder is commonly included. It preserves flexibility over inheritance and helps preserve favourable tax treatment for your beneficiaries.

Deeds and funding

The home is transferred by a new deed recorded in the county where it sits, meeting KRS 382.130 and the consideration certificate requirement of KRS 382.135. An unfunded trust protects nothing. See trust funding and retitling.

Powers of attorney to match

Your agent needs the express authority under KRS 457.245 to create and fund trusts and make gifts, or the plan cannot be continued if you lose capacity partway through.

The home and land

Usually the primary asset and the one families most want to keep. It is also the asset most exposed to care costs and to Kentucky estate recovery.

Rental or farm property

Illiquid assets are especially vulnerable to care costs since they cannot be partly spent, and they often carry significant family importance.

Kentucky Estate Recovery Still Applies

Qualifying for Medicaid is only half of what a family cares about. The other half is whether the house survives, and here Kentucky differs sharply from what national guidance assumes.

Kentucky recovers from the estates of Medicaid recipients under 907 KAR 1:585, which defines estate to include not only probate property but all property in which the recipient held legal title or an interest at death, to the extent of that interest, whether it passed through joint tenancy, tenancy in common survivorship, life estate, living trust or other arrangement.

That definition defeats the usual shortcuts. Putting the house in joint names, creating a life estate, or moving it into a revocable living trust are all expressly reached. Advice that avoiding probate avoids recovery is written for other states.

What does work is the assets genuinely no longer being owned by the recipient at death, which is exactly what a properly drafted and timely funded irrevocable trust achieves. Eligibility and recovery are solved by the same instrument, provided it is done early enough. See estate recovery defense.

• You keep the right to live in the home for life
• You keep income generated by trust assets
• You give up the ability to revoke the trust
• You give up access to trust principal
• The trustee must be someone other than you
• Full protection arrives once sixty months have passed
• The basis adjustment at death is preserved by careful drafting
• The trust must actually be funded to have any effect

Mistakes With Medicaid Asset Protection Trusts

Signing and never funding

The single most common failure. Without a recorded deed and retitled accounts, the trust protects nothing at all.

Using a revocable trust instead

Revocable means countable. KRS 386B.5-020(7)(a) leaves a self-settled interest reachable outside the new qualified trust statute, and a revocable trust is not a qualified trust in any event.

Serving as your own trustee

Retaining control over the trust undermines the entire structure. The trustee has to be someone else.

Deeding the house to the children instead

It creates a transfer penalty, exposes the home to the children creditors and divorces, forfeits the basis adjustment at death, and leaves you with no legal right to remain.

Assuming the new qualified trust statute solves Medicaid

It is a creditor-law statute. It does not shorten the sixty-month look-back and does not make a self-settled trust non-countable for eligibility.

Waiting too long

Everything here depends on the sixty months running out. Each year of delay reduces what can be protected without cost, and the day a diagnosis arrives is the day the window starts closing.