A Medicaid Asset Protection Trust (MAPT) can be helpful for estate planning if you believe you or your spouse will need long-term care at some point. Transferring assets to these types of trusts allows you to qualify for Medicaid to pay for long-term care while preserving your savings. If you don’t have long-term care insurance, consider adding a Medicaid trust to your estate plan. Understanding how this kind of trust works can help you decide if it’s right for you.
A financial advisor can help you create a comprehensive estate plan that provides for a spouse with special needs after your death.
Medicaid Asset Protection Trust, explained
Medicaid trusts serve a very specific purpose: protecting your assets if you or your spouse needs long-term care. These trusts are designed to fill a gap that can exist if you don’t have long-term care insurance and you want to avoid draining your assets to pay for nursing home care.
While Medicare covers some health care costs for seniors age 65 and older, it does not cover long-term care in a nursing home. Medicaid, on the other hand, does pay for long-term care, but there’s a catch. You must be financially eligible to be eligible for Medicaid.
Each state is responsible for administering its Medicaid program. But in general, qualification is based on two things:
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Income, including money you earn from work, benefits from retirement plans, social security retirement or disability benefits, retirement benefits, and annuity payments
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Assets, including, for example, savings accounts, taxable investment accounts, real estate or land
If you’ve worked hard to save and invest and accumulate significant assets, you may not be able to get Medicaid for long-term care. Or at least you can’t qualify without spending some of those assets first. With a Medicaid asset protection trust, you can avoid that scenario.
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How a Medicaid Trust Works
A Medicaid trust is a type of irrevocable trust. That means that once you create the trust and transfer assets into it, you cannot take those assets out. The types of assets you can transfer to a Medicaid Asset Protection Trust may include:
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Qualified retirement accounts, including a 401(k) or IRA
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Vehicles
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Personal belongings, including jewelry, heirlooms and other valuables
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Certain life insurance policies
You can also transfer a home to a Medicaid trust if it is your primary residence or your spouse’s primary residence. This type of transfer can be tricky, depending on what the home is worth and how much equity you’ve built up. So it’s wise to talk to an estate planning or Medicaid planning attorney first.
Some assets may not affect your eligibility for Medicaid if they are below the limits specified for your state. For example, bank accounts, CDs, money market accounts, and taxable investment accounts may not account if the total combined balance is below a certain amount. You should check the countable asset limits in your country to determine whether you are above or below the allowable threshold.
Benefits of Setting Up a Medicaid Trust
A Medicaid asset protection trust is similar to other trusts in that a trustee is called to manage trust assets. The trust may also have one or more beneficiaries. The beneficiaries could receive assets in the trust or benefit from the income they generate. By transferring eligible assets to a Medicaid trust, you can avoid the spending requirement to qualify for coverage. Based on your state’s guidelines, if you have too many assets to qualify for Medicaid, you must use some of them to cover long-term care or other medical expenses in order to qualify for Medicaid.
This is problematic for two reasons. First, it reduces the size of the estate you must pass on to a surviving spouse, adult children, or other beneficiaries. And second, selling certain assets can have tax consequences if you have to pay capital gains on the sale. With a Medicaid trust, you can avoid both scenarios.
There’s also another benefit if your state actively enforces the reinstatement of Medicaid assets. This practice allows states that pay for long-term care costs through Medicaid to try to recover some of that money from the recipient’s estate once they die. Some exclusions are allowed. For example, states may not attempt to recover assets from a disabled surviving spouse or minor children. But if you have a Medicaid trust, you can make sure you don’t have to worry about recovering estates being a problem.
Special Considerations for Medicaid Trusts
While Medicaid asset protection trusts can be helpful in estate planning, there are a few things to keep in mind. One of the most important is the look back period.
The Medicaid lookback period is a period during which any transfer of assets to a Medicaid trust would still be included in eligibility considerations. In most cases, this look back period extends back five years from when you or your partner entered a nursing home. So if you’re interested in using a Medicaid trust to protect assets, you may want to create one sooner rather than later to avoid complications during the lookback period.
The next thing to keep in mind is that once assets go into a Medicaid trust, that transfer is permanent and irrevocable. So you need to be pretty sure that setting up a Medicaid trust makes sense for you and that you’re comfortable with the permanent transfer of assets.
Finally, it’s important to consider the cost of creating and maintaining a Medicaid trust. Establishing a trust can be more expensive and time-consuming than preparing a will or living will. If you don’t have many assets, say less than $100,000, setting up a Medicaid trust may not make sense. Talking to a financial advisor or estate planning attorney can help you decide if this is the best way to protect your wealth.
In short
Medicaid trusts can help you keep a greater portion of your wealth in the family and pass it on to future generations should you or your spouse require long-term care. Given the costs associated with nursing home care, it may be worth exploring the benefits of a Medicaid asset protection trust. However, it is also useful to consider how likely it is that you or your partner will need long-term care as you get older.
Wealth planning tips
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Consider talking to a financial advisor about long-term care and what that could mean for Medicaid planning. If you don’t already have a financial advisor, it shouldn’t be difficult to find one. SmartAsset’s free tool matches you with up to three financial advisors operating in your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Purchasing long-term care insurance may be another solution when planning the cost of nursing home care. This type of insurance can pay benefits to cover long-term care. Some long-term care policies also include a life insurance component.
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