How a Medicaid Trust Protects Your Assets

A Medicaid Asset Protection Trust (MAPT) can be used to place certain property in a trust before applying for Medicaid-covered long-term care. Medicaid eligibility depends partly on an applicant’s financial resources. Assets transferred to a properly structured trust may eventually receive different treatment from property the applicant continues to own directly. However, Medicaid transfer rules, including the five-year look-back period, can affect whether the strategy works as intended.

A financial advisor can help you create a comprehensive estate plan, including helping to assess whether or not a trust may be a good fit.

What Is a Medicaid Asset Protection Trust?

A Medicaid Asset Protection Trust changes an individual’s ownership and access to certain property. Typically, you would structure an MAPT as an irrevocable trust. For Medicaid purposes, the terms of the trust matter because assets that remain available to the applicant can affect eligibility.

Medicare and Medicaid provide different coverage for long-term care. Medicare may cover a limited stay in a skilled nursing facility that meets certain requirements. However, it does not generally pay for ongoing custodial nursing home care. Medicaid can pay for nursing facility care and certain home and community-based services for people who meet applicable requirements.

Individual states administer their own Medicaid programs according to federal rules. As a result, financial eligibility standards and the treatment of particular assets can vary depending on where you live.

Income and resources can both factor into eligibility. Cash, investment portfolios, and certain real estate may count toward applicable limits, while Medicaid rules may exclude other assets.

Married couples may have additional protections when one spouse needs long-term care. Medicaid’s spousal impoverishment provisions allow the spouse who remains at home to keep specified amounts of income and resources. It does not require the couple to spend all their property before coverage begins.

How a Medicaid Trust Works

Establishing a MAPT generally involves giving a trustee control over property that you previously owned yourself. The trustee then handles that property according to instructions contained in the trust rather than at your unrestricted direction.

Because the arrangement is generally irrevocable, you typically cannot dissolve the trust whenever you want and take its assets back. Your Medicaid eligibility and benefits depend on the terms of your trust, and how it allows you to control the property within it.

The trust can identify beneficiaries who may later receive the property. Its terms can also determine what rights, if any, you retain while you are alive. If the document gives you access to trust principal, that access can affect how Medicaid evaluates the assets.

Property considered for a MAPT can include:

A home or other real estate
Savings and checking accounts
Taxable investment accounts
Certain personal property
Certain life insurance policies

Retirement savings require separate analysis. You cannot simply retitle a traditional IRA or 401(k) as trust property without making changes to the account. Taking funds from a traditional IRA can also generate taxable income. Traditional IRA distributions are generally taxable except to the extent they represent basis or qualify for another exception.

A home also warrants individual review. A primary residence can receive special treatment under Medicaid rules in some circumstances. Moving it into an irrevocable trust may therefore produce a different result from transferring an ordinary countable asset. Review the limits on countable assets in your state to determine whether you’re over or under the allowed threshold.

Click Your State to Get Matched With Financial Advisors That Serve Your Area

Choose your state and answer some questions to get matched with up to three fiduciary advisors that serve your area.

The Five-Year Medicaid Look-Back Period

The timing of a transfer can determine whether a MAPT helps with Medicaid eligibility. Medicaid agencies review five years’ worth of financial information when you apply. This includes any transfers for less than fair market value. Moving assets into a MAPT can fall within these transfer rules. If a transfer occurs during the look-back period, it can lead to a period when Medicaid will not pay for covered long-term care, depending on the circumstances.

For example, suppose you place $200,000 of investments into a MAPT and seek Medicaid nursing home coverage two years later. Because the transfer occurred within the five-year window, Medicaid can consider it when applying the transfer rules.

You should try to establish a MAPT well before you need long-term care. Creating and funding the trust shortly before applying for Medicaid generally will not immediately remove the effect of the transferred assets.

Benefits of Establishing a Medicaid Asset Protection Trust

Once the relevant Medicaid transfer period has passed, assets held under an appropriately drafted MAPT may not receive the same treatment as property you still own and can use freely. This can allow qualifying property to remain in the trust for beneficiaries rather than being available to meet long-term care expenses.

A MAPT also determines who will oversee the property. The trustee manages trust assets and carries out the provisions contained in the document. Beneficiaries receive whatever rights or distributions the trust gives them.

Another issue is what happens after a Medicaid recipient dies. Medicaid operates an estate recovery program that allows states to seek repayment for specified benefits. For recipients age 55 or older, states must pursue recovery for nursing facility services, home and community-based services and certain related hospital and prescription drug costs.

There are limits on this process. Recovery cannot proceed from a deceased recipient’s estate when they have a surviving spouse, a child under age 21, or a blind or disabled child of any age. States must also provide a way to request relief when recovery would cause undue hardship.

Whether an estate recovery can include a particular asset held in a MAPT depends on applicable state rules and the asset’s ownership structure. Medicaid eligibility during life, and estate recovery after death, should therefore be considered separately.

Assets That Require Extra Care Before Funding a MAPT

The consequences of transferring property can vary substantially depending on the asset involved. Before funding a MAPT, it can be useful to identify assets that already receive favorable Medicaid treatment or could generate other financial consequences when ownership changes.

Retirement accounts are one example. Removing money from a traditional IRA to fund a trust can produce a taxable distribution. If the account contains nondeductible contributions, only part of a distribution may be taxable.

Age can introduce another consideration. Distributions from an IRA or retirement plan before age 59 1/2 may be subject to an additional 10% federal tax unless an exception applies.

Real estate presents different issues. A home may already receive favorable treatment when Medicaid calculates an applicant’s resources, depending on who lives there and other circumstances. Placing it in a MAPT also means the trustee will have authority over the property under the terms of the trust.

Cash and taxable investments do not have the same retirement-account restrictions. However, transferring them still means giving up the level of control you had when you held them in your own name.

Vehicles and personal belongings may also receive exclusions under applicable Medicaid rules. If an asset would not prevent Medicaid eligibility in the first place, transferring it may provide little advantage.

Medicaid Asset Protection Trusts and Estate Recovery

Medicaid’s financial eligibility rules determine whether someone can receive benefits, while estate recovery addresses certain benefits already paid on that person’s behalf. The distinction can be particularly important for property such as a primary residence.

A home, for example, may not prevent someone from qualifying for Medicaid under certain circumstances. That does not necessarily mean the property will receive the same treatment after the recipient dies.

Federal law requires states to pursue certain Medicaid expenses from estates, although the extent of recovery can vary. States may also elect to recover additional Medicaid expenses beyond the federally required categories.

Trust property can raise its own recovery issues. Medicaid notes that, under certain conditions, funds left in a trust when an enrollee dies may be used to reimburse the program.

For this reason, placing property in a MAPT should not be treated as an automatic exemption from estate recovery. The state’s rules and the legal ownership of the property after the transfer can affect the result.

Special Considerations for Medicaid Trusts

A MAPT generally requires giving up substantial control over the assets transferred to it. That restriction can become important if your financial circumstances change and you later need money that was placed in the trust.

Timing presents another limitation. Transfers made during Medicaid’s five-year look-back period can affect eligibility for long-term care coverage, so waiting until care is imminent can reduce the usefulness of this approach.

Married couples should also consider the protections already available to a spouse who continues living in the community. Depending on the couple’s finances, those rules can affect how much property needs additional Medicaid planning.

Tax consequences should be reviewed before moving assets. This is particularly important for retirement savings because distributions from a traditional IRA are generally taxable in the year received.

Cost can also affect the decision. Establishing a trust can involve legal fees and ongoing administrative responsibilities. Rather than relying on a particular asset threshold, the decision can depend on the type of property you own, the likelihood of needing long-term care and the Medicaid planning alternatives available in your state.

Bottom Line

A Medicaid Asset Protection Trust can change how certain property is owned and accessed before an individual applies for Medicaid-covered long-term care. The strategy generally requires giving up direct control of the transferred assets, and the five-year look-back period means a MAPT typically needs to be funded well before an application for long-term care benefits. An attorney familiar with Medicaid planning can review the trust and applicable state requirements, while a financial advisor can help assess how potential long-term care costs fit with your other financial goals.

Tips for Estate Planning

Consider talking to a financial advisor about long-term care and what that might mean for Medicaid planning If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goal, get started now.
Buying a long-term care insurance policy can be another solution when planning how to pay for nursing home care. This type of insurance policy can pay out benefits to cover long-term care. Some long-term care policies also include a life insurance component.