As you age, the likelihood of needing help with daily living activities, whether through home care assistance, assisted living, or nursing home care, increases significantly. Long-term care is expensive, so paying for care out of pocket can easily drain a lifetime of savings in a matter of months.
A widespread misconception among seniors is that Medicare will step in to cover these expenses. While Medicare provides excellent coverage for acute hospital stays, short-term rehabilitation, and doctor visits, it does not cover long-term, non-medical custodial care.
Medicaid, known in South Carolina as Healthy Connections, is the primary program that pays for ongoing long-term care services. This makes Medicaid highly relevant to your overall estate plan, even if you already qualify for Medicare.
However, obtaining Medicaid coverage requires meeting strict financial eligibility standards. In South Carolina, a single applicant can generally keep no more than $2,000 in countable assets to qualify.
Creating a Medicaid trust allows you to protect your home and savings while remaining within state asset limits. If you transfer your assets into a trust, a common question arises: can you still receive the income generated by those assets?
Understanding How a Medicaid Trust Handles Income
The short answer is yes. Depending on how your trust is drafted and the type of trust you use, you can continue to receive income generated by assets held inside a Medicaid trust.
When discussing Medicaid planning in South Carolina, two primary types of trusts come into play: a Medicaid asset protection trust and a Medicaid income trust. Each serves a distinct purpose regarding how your money and income are handled.
Medicaid Asset Protection Trusts
A Medicaid asset protection trust is an irrevocable trust created well in advance of needing long-term care. You transfer assets, such as real estate, dividend-paying stocks, mutual funds, or rental properties, into the trust to protect them from long-term care costs.
When structuring an irrevocable Medicaid asset protection trust, you give up ownership and control of the principal (the core assets placed in the trust). However, you can retain the right to receive all the income generated by those assets during your lifetime.
Income generated by trust assets may include:
- Interest earned on cash or cash equivalents held in the trust
- Dividends paid out by stocks or mutual funds
- Net rental income generated by real estate properties owned by the trust
By remaining the income beneficiary, you maintain a steady cash flow from your investments to cover your day-to-day living expenses while keeping the underlying principal protected inside the trust.
The Clear Division Between Principal and Income
To keep your assets protected, the language of the trust must strictly divide principal from income:
- Principal: The core property or capital placed into the trust (e.g., the house itself, stock shares, or initial bank funds). You cannot have any legal right to withdraw, spend, or demand payouts from the principal.
- Income: The earnings generated by that principal over time. You can receive these regular earnings directly.
If the trust terms give you access to the principal, Medicaid will view the entire trust account as a countable asset, destroying your financial eligibility.
How Trust Income Affects Medicaid Eligibility
While receiving income from an asset protection trust helps support your lifestyle before you need care, that income is treated differently once you apply for Medicaid long-term care benefits.
South Carolina evaluates both your total assets and your gross monthly income when you apply for benefits. Any income you receive from a Medicaid trust counts toward your monthly income calculations alongside Social Security, pensions, and retirement account withdrawals.
The South Carolina Income Cap
South Carolina is an “income cap” state. This means there is a strict limit on the gross monthly income an applicant can receive while qualifying for long-term care coverage.
If your combined monthly income, including distributions from your trust, is below the state limit, you satisfy the income requirement. If your income exceeds that threshold, you cannot qualify through standard means without additional structural planning.
What Happens to Your Income When You Enter Care
If you qualify for Medicaid and move into a long-term care facility, you do not keep your full monthly income. Medicaid rules require nursing home residents to contribute most of their monthly income toward their cost of care, a payment known as patient liability.
You are permitted to retain only a small monthly personal needs allowance ($60 in South Carolina) to cover basic personal items like haircuts and clothing, along with funds needed to pay for approved health insurance premiums.
The remainder of your monthly income, including trust distributions, goes directly to the facility toward your monthly bill, with Medicaid covering the rest.
Using a Medicaid Income Trust for Excess Income
If your monthly income from Social Security, pensions, and other sources exceeds South Carolina’s income cap, you do not automatically lose out on Medicaid coverage. Instead, you can utilize a specialized tool known as a Medicaid income trust (often called a Qualified Income Trust or Miller Trust).
Unlike an asset protection trust, which shields accumulated property and savings, a Medicaid income trust is designed solely to handle excess monthly income.
Here is how a Medicaid income trust works:
- You establish a dedicated trust account and name a trustee to manage it.
- Your excess monthly income—or all of your monthly income—is deposited into the trust account each month.
- The money placed into the income trust is then paid out directly toward your care expenses and allowable fees.
By routing your excess income through this specific trust structure, South Carolina Medicaid disregards the surplus amount, allowing you to meet the state income cap and receive long-term care coverage.
Important Guidelines for Medicaid Trust Planning
Establishing a trust that successfully protects your assets while preserving your right to income requires strict adherence to state and federal rules:
- Irrevocability Is Mandatory: You cannot use a standard revocable living trust for Medicaid asset protection. A revocable trust allows you to take assets back at any time, which means Medicaid treats those assets as fully available to pay for your care.
- The Five-Year Lookback Period: When you apply for Medicaid long-term care in South Carolina, the state reviews all asset transfers made within the prior 60 months (5 years). Moving assets into an irrevocable trust triggers this lookback clock, making early planning essential.
- Selecting the Right Trustee: You cannot act as the trustee of your own Medicaid asset protection trust or Medicaid income trust. Naming a trusted adult child, relative, or professional fiduciary ensures the trust is administered according to state legal requirements.
- Prohibitions on Principal Payouts: The trust agreement must explicitly forbid the trustee from distributing principal to you under any circumstances.
By separating your principal assets from the income they generate, you can maintain your financial independence during your active years while putting a solid shield in place to preserve your family legacy if long-term care becomes necessary down the road.
Take Action Today!
Our firm can help you position your assets wisely with future long-term care costs in mind. To set the wheels in motion, call our Bluffton, SC elder law office at 843-815-8580 or send us a message through our contact page.
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