Medicaid Planning: Benefits of a Medicaid Asset Protection Trust Versus an Outright Gift

Medicaid Planning: Benefits of a Medicaid Asset Protection Trust Versus an Outright Gift article image

Written by: Michele Procino-Wells, Esquire

You’ve decided it is time to consider your options with regard to Medicaid planning. You haven’t met with an attorney yet, but you’ve heard that qualifying for Medicaid coverage for a nursing home stay will require reducing your net worth and assets. In considering this, you decide the easiest way to accomplish this goal is to start gifting your property, assets, and real estate now, then you won’t have to worry about it later, right?

Unfortunately, this solution may seem simple on its face – but there may be a far better option to accomplish the same result. Outright gifting of assets and property can not only create major eligibility problems should you need long-term care in the next few years, but is not always the wisest way to transfer assets to future generations. To learn more about this complex area of elder law and Medicaid planning, we encourage you to meet with an experienced attorney as soon as possible.

What is a Medicaid Asset Protection Trust?

As you are undoubtedly aware, qualifying for Medicaid requires the significant reduction of one’s assets so as to meet the net worth and monthly income requirements set by the federal and state government. If you are married, you can generally retain certain assets such as the marital home and one vehicle (so long as one spouse remains in the home and uses the vehicle). Otherwise, investment accounts, real estate, valuable personal property, and all other assets must be spent down or lawfully transferred out of your name in order to qualify.

A Medicaid Asset Protection Trust (MAPT) is an irrevocable trust instrument that allows the individuals executing the trust (known as “trustors” or “settlors”) to transfer and retitle assets into the name of the trust, effectively severing their ownership and dominion over those assets. Being irrevocable in nature, a MAPT cannot be undone or significantly altered once it is executed and funded. For some, this perceived loss of control over their hard-earned resources can bring about anxiety and insecurity. However, the alternative arrangement – spending the entire lot on the inflated costs of nursing care – will be ultimately much less palatable when the time comes.

The primary purpose of a MAPT is to shelter assets from the reach of Medicaid spend down rules. Assuming the assets remain in the MAPT for at least five years, these assets will remain sheltered from the grasp of Medicaid indefinitely as the trustors are not considered the actual owners. Otherwise, applicants will endure a penalty period, and will be forced to use their own assets to cover the costs of long-term care for a period congruent to the value of the asset(s) transferred.

Why not just give gifts?

Outright gifting will still get you there, provided the transfers occurred more than five years before applying for coverage. However, there are several reasons why a MAPT is usually a more financially sound approach. For the following reasons, a MAPT can offer possible protection from unnecessary taxes, creditors, and other unforeseen issues:

  • A creditor of your beneficiaries cannot attach a lien or judgment to that beneficiary’s future assets (his or her share of the trust), unlike the vulnerability of an outright gift;

  • The future sale of the trustors’ primary residence will be excluded from capital gains tax, if applicable;

  • The step-up basis of trustors’ assets will be preserved upon their deaths;

  • Assets placed in trust may earn income and appreciate over time. Trustors can choose who will receive this income, and can protect against the potential for wasteful spending by beneficiaries having received an outright gift;

  • Trustors have an opportunity to draft certain provisions in the MAPT to ensure beneficiaries continue to qualify for means-based government assistance (if applicable);

  • Trustors can place contingencies and conditions on the receipt and use of trust assets and income, unlike an outright gift which can be spent and squandered;

In sum, a MAPT allows trustors to maintain some semblance of control over the distribution of their hard-earned assets, even if placed in an irrevocable trust. By contrast, outright gifts can result in a no-strings-attached spending spree when placed in unreliable hands – as well as result in possible unforeseen tax consequences.