Pros and Cons of a Medicaid Asset Protection Trust

Bags of money balanced on a scale against family members inside house.A Medicaid Asset Protection Trust (MAPT) is one option a person may consider to protect their assets from Medicaid and nursing homes or long-term care.

What Is a MAPT?

A MAPT is an irrevocable trust created during your lifetime. (Note that you cannot revoke irrevocable trusts after you have established them. This differs from a revocable/living trust, to which you can make updates.)

The primary goal of a MAPT is to transfer assets to it so that Medicaid will not count these assets toward your resource limit when determining whether you qualify for Medicaid benefits.

However, creating an irrevocable trust comes with a certain lack of control over the assets you transfer to it. Before making such a significant decision, consider some pros and cons to see if this long-term care strategy is right for you.

Benefits of Medicaid Asset Protection Trusts

1. You Can Still Benefit From the Assets of a MAPT

As mentioned above, transfers of assets to a MAPT cause you to relinquish your ownership and control of them. However, the finality of the arrangement is not as harsh as it sounds.

In creating a MAPT, you select a person (trustee) who manages the trust assets for your benefit. So, if you transfer investment accounts to the MAPT, you can still receive the income generated from these investments. If you transfer your home, you can continue living there. In exchange for giving up control of your assets to a MAPT, your assets no longer count against you for Medicaid eligibility purposes.

2. You Will Be Protecting Assets From Medicaid and Other Long-Term Care Creditors

Once your assets are in a MAPT and other criteria are met, Medicaid can’t seize them or ask you to spend them down to pay for your nursing home or long-term care costs. These assets also are not subject to Medicaid’s estate recovery program.

As a result, your heirs can benefit from the assets without the interference of Medicaid or liens it could otherwise file against your estate after you pass.

3. You Can Choose Your Beneficiaries

A MAPT also functions as an estate planning tool. This is because you can designate who receives what remains of the trust upon your passing. The individuals you choose will receive the assets per the terms of the trust agreement. This type of planning also avoids probate in many cases, which can be one less thing for your loved ones to worry about.

Note that you may be able to retain a “limited power of appointment.” This allows you to change who the beneficiaries of the MAPT will be, should your wishes or family circumstances change.

4. Protect Your Assets From Beneficiaries’ Creditors

Even though you can designate now who will benefit from your MAPT, those individuals do not have full access to the trust’s assets. The structure of this type of trust prevents this.

In turn, their creditors do not have access to assets in the trust, either. And, if your child is a beneficiary and is going through a messy divorce, neither does their spouse. You can also designate how bequests to beneficiaries can be used.

5. Capital Gains Tax Implications

A properly drafted MAPT preserves the full capital gains tax exclusion on the primary residence (currently $250,000 per spouse). Later, when a person’s beneficiaries sell the home, its value would be the market price at the date of gifting and not the original purchase price. This can avoid or significantly minimize the capital gains tax that your heirs may owe.

Drawbacks of Medicaid Asset Protection Trusts

1. Timing Is Everything

For a MAPT to function as intended, you need to create it in advance to avoid the Medicaid lookback period. In most states, this is five years for nursing home or institutional care. In some states, there may also be a lookback period for community Medicaid care (home aides, local programs, etc.).

If less than five years have elapsed since you created your MAPT, you may still be responsible for some or all of your long-term care costs until sufficient time has passed.

2. Income From MAPT Is Countable by Medicaid

Although assets in a MAPT may not be “countable” by Medicaid toward your resource limit, these assets may still generate income. If this income is payable to you, it may cause you to exceed the income limit permitted in your state.

If this happens to you, you may have other options, such as utilizing a pooled income trust or contributing partially toward your care.

3. Giving Up Control Is Non-Negotiable

 trust will not qualify as a MAPT if you retain control other than the limited power of appointment that may be permitted in your situation. You must accept that a person you select to act as trustee will manage the trust, distribute funds and income from the trust, and also be the effective owner of the assets.

In addition, creating a MAPT but not transferring assets to it is ineffective. You need to fully commit to the concept for it to benefit you.

4. Setting Up a MAPT Is Costly

Creating and implementing a MAPT is a complex legal task requiring many hours of work and expenditures made on your behalf. And because MAPTs are tied to individual state and federal laws, the expertise of a qualified Medicaid attorney is essential.

You should expect that this expertise comes at the cost of several thousand dollars or more. However, your potential savings could be far greater for you and your family, so the price is often well worth it.

5. Potential Effects on Care

The MAPT strategy is designed to preserve assets and wealth. However, it assumes that a person will rely on Medicaid to pay for a portion of their care – and Medicaid does not cover all facilities. For example, many assisted living facilities are not licensed as assisted living programs and only accept private pay residents. Thus, relying on Medicaid could affect the choice and quality of care a person may receive.

The pros and cons discussed above are not exhaustive, and there may be other ones that apply to your situation. Investing in Medicaid Asset Protection Trusts is a highly fact-specific process, but they are not suitable for everyone.

Medicaid Trust Planning

Speak with an elder law attorney to discuss how Medicaid Asset Protection Trusts may affect other benefits you receive. They can also assist you with your overall estate plan, potential tax consequences, and long-term care options. Find a qualified elder law attorney near you today.

To delve deeper into Medicaid and long-term care planning, check out the following articles: