The sole purpose of an Income Cap Trust is to qualify an individual for Medicaid assistance. When an elder has fixed income over a certain limit (in 2011 it is $2,022 a month gross income), the elder will be unable to qualify for Medicaid assistance. When the current average cost of assisted care is over $5,000 a month, the Medicaid limit would make it impossible for many elders to get assistance. When the gap between the Medicaid limit and the cost of care is so wide, many elders would be without a place to live. This is where an Income Cap Trust comes in.
The elder can create an Income Cap Trust to receive all of the elder’s fixed income. The trustee for the Trust would then use the income to pay the elder’s monthly expenses as required by Medicaid law. Such expenses include: personal needs allowance and maintenance; trust administrative costs; community spouse allowance; health insurance premiums; burial plans; incurred medical expenses; other reserves; and patient liability to care facility.
There are three parties to the Income Cap Trust – the grantor who signs the trust, the beneficiary who benefits from the trust, and the trustee who administers the trust. Usually the grantor and beneficiary are the same person. The beneficiary cannot be the trustee and usually the trustee is a family member or friend of the beneficiary.
To establish the Income Cap Trust, the legal document creating the trust is drafted by an elder law or estate planning attorney. The document is executed and the trustee deposits the income into a new bank account established by the trustee in the name of the Income Cap Trust. The trustee then pays expenses according to the budget prepared by the attorney and approved by the Medicaid case worker.
After the elder passes, any remaining funds in the trust will go to the state. Generally, however, there will be no funds remaining in the trust when the elder passes away.