How Medicaid Planning Trusts Protect Assets and Homes from Estate Recovery

Last updated: March 28, 2019

 

What are Medicaid Asset Protection Trusts (MAPT)?

Medicaid Asset Protection Trusts (MAPT) can be a valuable planning strategy to meet Medicaid’s asset limit when an applicant has excess assets. Simply stated, these trusts protect a Medicaid applicant’s assets from being counted for eligibility purposes. This type of trust enables someone who would otherwise be ineligible for Medicaid to become Medicaid eligible and receive the care they require be at home or in a nursing home. Assets in this type of trust are no longer considered owned by the Medicaid applicant. MAPTs also protect assets for one’s children and other relatives, which is a win-win for Medicaid applicants and their families.

 Medicaid Asset Protection Trusts are also referred to as Medicaid Planning Trusts, or simply, Medicaid Trusts.

It is important to understand that there are many different types of trusts and not all of them are Medicaid compliant. For instance, family trusts, commonly called revocable living trusts, are also different from MAPTs. Generally, family trusts are not adequate in protecting money and assets from Medicaid because the language of the trust makes it revocable (meaning the trust can be cancelled or altered) or allows for money in the trust to be used for the Medicaid applicant’s long-term care costs. Therefore, assets in this type of trust would have to be “spent down” to meet Medicaid’s asset limit in order for one to qualify for Medicaid.

Please note that this page is about Medicaid Asset Protection Trusts. There are several other types of trusts that relevant to Medicaid eligibility but will not be covered in this article. Irrevocable funeral trusts, also known as burial trusts, are used to protect small amounts of assets specifically for funeral and burial costs. There are also qualifying income trusts (or qualified income trusts, abbreviated as QITs). This is important to mention because one might find it easy to confuse MAPTs and QITs. While MAPTs protect one’s assets and allow one to meet the asset limit, QITs (also called Miller Trusts) allow one who is over the income limit to become income eligible for Medicaid purposes. Unfortunately, not all states allow QITs.

 Did You Know? If you transfer your home to a Medicaid asset protection trust, you can reserve the right to live there for as long as you live.

 

Why Are Medicaid Asset Protection Trusts Important?

While each state runs its Medicaid program within federally set guidelines, there is “wiggle” room for each state to set its own rules within those larger guidelines. Generally speaking, the asset limit for eligibility purposes for an elderly individual applying for long-term care Medicaid is $2,000. However, this asset limit can be lower or higher depending on the state in which one resides. (For state specific asset limits, click here). While some higher value assets are usually considered exempt (uncountable), such as one’s primary residence, a vehicle, and wedding rings, too often applicants are still over the asset limit but still cannot afford their cost of care. Therefore, any assets that exceed the asset limit need to be “spent down” or a planning strategy, such as a Medicaid Asset Protection Trust, needs to be put into place to help the applicant qualify for the care they require.

 

How Do Medicaid Asset Protection Trusts Work?

To get a better grasp of Medicaid asset protection trusts, it’s important to understand the terminology associated with them. First, there is the individual who creates the MAPT. This person may be referred to by a number of different names, including grantor, trustmaker, and settlor. The trustee is the manager of the trust and controls the assets in the trust. While neither trustmakers nor their spouses can be trustees, adult children and other relatives can be named as trustees. They must adhere to the rules set forth by the trust, which are very specific as far as how the money can be used. For instance, there should be a strict prohibition of using trust funds on the trustee. There is also a beneficiary or beneficiaries, who is / are the person(s) who benefits from the trust after the trustmaker passes away. In order for the trust to be Medicaid exempt, the principal beneficiary must be someone other than the trustmaker. This is because if the trustmaker were also the beneficiary, he or she would have access to the assets, and Medicaid would consider them available to pay for his or her care and supports.

In addition, the trust must be irrevocable in order to be exempt from Medicaid’s asset limit. This means that the trust cannot be cancelled or changed. Once the assets are transferred into the trust, they no longer belong to the trustmaker, nor can the trustmaker regain ownership of the assets. However, if the assets are in a revocable (can be changed or terminated) trust, Medicaid considers the assets to still be owned by the Medicaid applicant. This is because the person who created the trust still has control over the assets held in the trust. Therefore, the assets are counted towards Medicaid’s asset limit.

  MAPTs cannot be used to shelter or reduce assets if the applicant is immediately applying for Medicaid.

Planning well in advance of needing long-term care Medicaid is the best course of action when considering a Medicaid Asset Protection Trust. This type of trust is not suitable for persons who need Medicaid immediately or within a short period of time. This is because MAPTs are a violation of Medicaid’s look back period if not set up prior to 5 years (2.5 years in California) before one applies for Medicaid. That said, there are other planning strategies for those who need Medicaid currently or in the near future.

 

Benefits of a Medicaid Asset Protection Trust

The assets in a Medicaid asset protection trust not only allow one to meet Medicaid’s asset limit without “spending down” assets, but the assets are also protected for the beneficiaries listed by the trustee. This means the assets are safe from Medicaid estate recovery. In simplified terms, when a Medicaid recipient passes away, the state in which the individual lived and received Medicaid benefits, attempts to collect reimbursement for which it paid for long-term care. This is done via the deceased’s estate. However, if one’s home and other assets are in a MAPT, the state cannot come after those assets. Learn more about Medicaid estate recovery.

 

Shortcomings of a Medicaid Asset Protection Trust

Planning well in advance of the need for Medicaid, if at all possible, is the best course of action. Medicaid asset protection trusts are ideal for persons who are healthy and don’t foresee needing Medicaid in the near future. This is because MAPTs violate Medicaid’s look back period. This is a period of 60-months in all states, with the exception of California, which only looks back 30-months. During the look back period, Medicaid checks to ensure no assets were sold or given away for less than they are worth in order for one to meet the asset eligibility limit. For Medicaid purposes, the transfer of assets to a Medicaid asset protection trust is seen as a gift. Therefore, it violates the look back rule. This can result in a period of Medicaid ineligibility. Therefore, a MAPT should be created with the idea that Medicaid will not be needed for a minimum of 2.5 years in California and 5 years in the rest of the states.

In addition, once the assets have been transferred to a MAPT, the trustee no longer has control or access to them. They no longer are considered owned by the individual.

Given the fairly expensive fees associated with the creation of a Medicaid Asset Protection Trust ($2,000 – $12,000), MAPT are typically not used for assets less than $100,000. Should a family need to reduce one’s assets to qualify for Medicaid in amounts less than $100,000 there are other approaches.

 

Gifting Assets vs. Creating a Medicaid Asset Protection Trust

While there is more flexibility with gifting assets and it does not require any legal work, it also violates Medicaid’s look back rule. Which as previously mentioned, results in a period of Medicaid ineligibility as a penalty. Therefore, like with MAPTS, gifting should occur 5 years (2.5 years in California) in advance of the need for Medicaid. In addition, capital gains taxes are a common concern with gifting.

 

What Type of Assets can go in an Asset Protection Trust?

A number of different types of assets can be put into a Medicaid Asset Protection Trust, including one’s home. When a trustee places his or her home in a MAPT, he or she can continue to live in the home. In fact, it is even possible to sell the home and for the trust to buy another one. However, there is one exception to this rule. In Michigan, a home is considered a countable asset when placed in a MAPT. Stated differently, the home is non-exempt and is counted towards Medicaid’s asset limit.

Other assets that are placed in MAPTS include real estate other than one’s primary home, checking and savings accounts, stocks and bonds, mutual funds, and CDs. In most cases, transferring retirement accounts (401k’s and IRAs) is not recommended due to tax implications with cashing out the plans and transferring them to a MAPT.

If assets that produce income are placed in the trust, the trustmaker is able to collect the income. Said differently, the principal is protected by the trust and the trustmaker receives the income produced by the principal. However, Medicaid also has income limits, so it’s important that this income does not cause one to have income over the limit. As of 2019, most states have an income limit of $2,313 / month for a single senior applying for long-term care. (To see income requirements in the state in which one resides, click here). In the situation where a Medicaid applicant is in a nursing home, income produced by the principal generally goes to the nursing home to help pay the cost of care.

 

How Do Medicaid Asset Protection Trust Rules Change by State?

Medicaid Asset Protection Trust rules are not only complicated and tend to change frequently, they also differ based on the state in which one resides. As mentioned above, Michigan considers a home in a trust, regardless of if it is revocable or irrevocable, a countable asset. California Medicaid (Medi-Cal), on the other hand, has very lax rules in regards to transferring a home to a trust. In CA, a home, even in a revocable trust, is exempt from Medicaid’s asset limit and is safe from estate recovery. This is very unusual. In most circumstances, revocable trusts do not keep assets safe from Medicaid’s asset limit and estate recovery. In addition, in CA, the state can only seek reimbursement of long-term care costs from those assets that go through probate (a legal process where a deceased person’s assets are distributed). If assets have been transferred to a revocable living trust, it is safe from estate recovery. This means it will avoid probate and estate recovery and the need for MAPTs are not as great in the state of CA as in other states.

Wisconsin also stands apart from the other states. In WI, trusts that are irrevocable can generally be altered or cancelled if all parties (trustmaker, trustee, and beneficiaries) are in agreement.

 

Is an Attorney Needed to Set up a Medicaid Asset Protection Trust?

It is imperative that a Medicaid Asset Protection Trust be set up correctly in order to ensure the assets transferred into the trust are exempt from Medicaid’s asset limit. As previously mentioned, the rules change frequently, as well as vary by state. This makes it important to have the trust created by someone who is familiar with the MAPT laws in one’s specific state. Also, remember that this type of trust needs to be created well in advance of the need for Medicaid, so as to not violate Medicaid’s look back rule. Incorrectly setting up a MAPT can inadvertently cause one to be ineligible for Medicaid, defeating the purpose of creating one. Therefore, an attorney should be used to set up a Medicaid Asset Protection Trust. Private Medicaid Planners often work with attorneys to keep costs low for their clients.

 

How Much Does it Cost to Create a Medicaid Asset Protection Trust?

The cost of creating a Medicaid Asset Protection Trust varies significantly from a low of $2,000 to a high of $12,000. While the price might seem high, in reality, a MAPT ends up saving persons money in the long run. This is because the nationwide average cost of nursing home care is over $7,000 / month, and a MAPT prevents one from having to pay out of pocket for nursing home expenses (and other long-term care costs).

When considering the cost, there are a lot of variables that factor into it. First of all, some attorneys don’t strictly do MAPTS. Rather they do a package of sorts. This may include a pour-over will, powers of attorney, advance health care directive (living will), and HIPAA medical information releases, in addition to the MAPT. Cost can be impacted by if the client is single or married, the assets being transferred into the trust, and if a crisis plan is needed. In addition, price varies by geographic location, with the price in urban areas generally costlier than in rural areas. The experience of the attorney can also impact the cost.

 

Alternatives to a Medicaid Asset Protection Trust

In addition to Medicaid asset protection trusts, there are other planning strategies to help lower one’s countable assets. These may include funeral trusts and annuities. In addition, there are also strategies to help one lower one’s income to become eligible for Medicaid. Learn more here.

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