A Medicaid Asset Protection Trust, also known as a MAPT, is a special kind of legal trust that lets people protect their assets from consideration for Medicaid eligibility, and thus to be qualified for Medicaid while still preserving their wealth for their heirs.
Introduction to Medicaid Asset Protection Trusts
With the cost of long-term care continuing to rise, more and more people are concerned about how to pay for long-term care without using up all of their life savings.
Nursing home care and assisted living can deplete an individual's assets relatively quickly, and what is left from a lifetime of saving often leaves little or nothing to pass along to one's loved ones.
Medicaid is a government program that covers health expenses for low-income individuals, and may pick up some of the cost, but it has limited financial qualifications.
This is where a Medicaid Asset Protection Trust, or MAPT, would come into play.
You transfer your assets into one of these types of trusts and can have it reduce your countable assets sufficiently enough to qualify for Medicaid without necessarily having to spend down your entire estate.
However, the complexities of a MAPT are that it works under a set of rules and requirements; most importantly, you need to know just how they work and when they are appropriate.
How Medicaid Asset Protection Trusts Work
A Medicaid Asset Protection Trust is an irrevocable trust. What that means is that once you put assets into the trust, you cannot get them out or change the terms of the trust without the agreement of the trustee and beneficiaries.
The great advantage of such a trust is that generally the assets inside the trust are not considered to be yours for Medicaid eligibility purposes.
Instead, these assets are part of the trust and under the control of a trustee who distributes the assets in accordance with the terms that one set up upon the trust's creation.
Primary Characteristics of a MAPT:
Irrevocability: The trust must be irrevocable in nature because such allows it to no longer be legally your asset, which is important for being able to keep them out of Medicaid's asset calculations.
Trustee Control: The trustee has control over the assets in the trust, and you no longer have direct access to them. It may include liquid assets, real estate, or other types of investments.
Income Generation: In some cases, the matter can be arranged so that the grantor receives income from the trust, while the principal remains beyond Medicaid's reach.
The Medicaid Look-Back Period
A primary concern in establishing a MAPT is Medicaid look-back. This is the period of time, often five years, in which Medicaid examines your financial history to see whether you gave away some assets to qualify for benefits.
If Medicaid concludes that assets were transferred to a MAPT during this lookback period, it will penalize you and deny you benefits for a period of time.
For instance, if you transfer $100 000 into a MAPT four years before applying for Medicaid, and the average monthly cost of care in your area is $10,000, Medicaid could impose a penalty period of 10 months, the $100,000 divided by the $10,000 monthly cost. You pay for your care out of pocket during this period.
Medicaid Asset Protection Trust- Benefits
Below are several important advantages for Medicaid Asset Protection Trusts, which are very useful to ensure that one does not undergo spending down, especially for very long-term care: asset protection.
The biggest advantage of a MAPT is the fact that it protects your assets from being counted to allow you to be qualified for Medicaid; hence, enabling you to qualify for Medicaid but still keep your wealth for the heirs.
Wealth Preservation: By placing your assets in the MAPT, you ensure that your savings, investments, and property can be transferred to your beneficiaries rather than being spent on your long-term care.
Probate Avoidance: The assets in the MAPT bypass the probate; this means they are transferred straight to your beneficiaries without the delays and costs associated with the probate process.
Tax Advantages: If established correctly, there may be some potential tax benefits associated with a MAPT; for instance, the retention of step-up on basis on the assets transferred to the trust and reduction of capital gain taxes on the ultimate beneficiaries.
Continued Use: The person setting this up may still be able to obtain benefit from the assets transferred onto the trust for a defined period of time.
Medicaid Asset Protection Trust Disadvantages
Even though a Medicaid Asset Protection Trust can offer substantial advantages in certain respects, there are several disadvantages you need to very carefully consider associated with them, including the following:
Irrevocability: Once you put assets into a MAPT, it isn't that easy to get the assets back. The lack of flexibility is a very strong disadvantage if your financial situation or healthcare needs change unexpectedly.
Loss of Control: Inasmuch as the trust is managed by a trustee, you no longer have direct control over the assets. While you can appoint a trustee you trust, for many, this will be a restricting situation.
Medicaid Penalties: If you transfer your assets into a MAPT within the look-back period, Medicaid may impose a penalty period during which time you are ineligible for benefits. The very existence of such a risk underlines the importance of planning in advance.
Burdensome and Expenses: since the creation of a MAPT involves expertise in law, this could mean the costs will not be cheap, involving attorneys' fees and other ongoing expenses of administering the trust.
Potential Conflict: the trustee is technically required to administer the trust in accordance with your desires; nevertheless, if a dispute of some kind arises amongst family members, it could create disputes or even litigation.
It is helpful to understand how a Medicaid Asset Protection Trust works, to first consider the differences between a MAPT and other types of trusts.
For example: Revocable Living Trusts Unlike MAPTs, revocable living trusts do not provide protection of assets for Medicaid purposes.
Since you still have ownership and control over the assets held in a revocable trust, those assets are considered part of your estate for the purposes of Medicaid eligibility.
Irrevocable Life Insurance Trusts: An ILIT is a special kind of irrevocable trust used only to hold life insurance policies.
The death benefit, accordingly, is kept outside of your estate for tax purposes.
While an ILIT can protect life insurance proceeds against estate taxes, the same kind of Medicaid asset protection as that afforded by a MAPT will not be provided.
Special Needs Trust: A kind of trust designed to provide for a beneficiary while not disqualifying the beneficiary from government benefits.
While a Special Needs Trust can protect assets from Medicaid, they often serve a different purpose than the MAPT that is discussed herein, which is about shielding assets of the person creating it.
Testamentary Trusts: A testamentary trust is one you create through your will. It doesn't take effect until you die.
It will provide a vehicle to control how the assets are distributed to beneficiaries, but it doesn't offer the protection of assets from Medicaid that a MAPT offers during one's lifetime.
Steps in Creating a Medicaid Asset Protection Trust
Successfully creating a MAPT requires careful planning, and it is something that usually needs to be done with the assistance of a knowledgeable attorney.
The following are general steps one would need to take to create one:
Approach an Estate Planning Attorney: The very first thing a person will do when someone is thinking about creating a MAPT is to consult with an elder law attorney who has his or her practice geared more towards Medicaid planning.
This lawyer can help explain the legal consequences such an action might have and ensure the trust is set up properly.
Evaluate Your Assets: First, identify the assets that you want to protect, then place those into the trust.
These can range from your house, your savings, your investments, and other forms of property with value.
Assign a Trustee: You will have to assign a trustee to look after the trust on your behalf. This has to be someone highly trusted-for instance, a family member or professional trustee.
Document the Trust: Your attorney will draft a deed of trust, citing therein the terms of the trust, such as how it should be managed and distributed.
Transfer Assets to the Trust: Once the trust has been set up, you will transfer ownership of the selected assets into that trust.
This becomes a very important step, as those assets that you wish to be exempt must be held by the trust in order for them not to be considered available to Medicaid.
Review and Monitor the Trust: The trust should be periodically reviewed with your attorney to ensure that the trust continues to meet your needs and complies with any changes in the Medicaid laws.
Common Misconceptions About Medicaid Asset Protection Trusts
There are a number of misconceptions about MAPTs which can result in confusion or inappropriate planning:
"I Can Control the Assets in the Trust": Many individuals believe that they will maintain the right of control over the assets placed in a MAPT.
Due to the fact that it is labeled as an irrevocable trust, control is ceded over to the trustee and you cannot modify the terms contained within the trust or your desires concerning it, without prior consent from the trustee.
"I Can Use a MAPT as a Last-Minute Strategy": Many people think that they can create a MAPT on the eve of applying for Medicaid.
This would be a strategy, but one fraught with, at best, some delays in eligibility and even penalties due to the five-year look-back period.
"Only Wealthy People Need a MAPT": Although MAPTs are often thought of for wealthier clients, a MAPT can make great sense for anyone whose assets exceed Medicaid's asset limits-even those of modest estates.
"A MAPT Covers All My Healthcare Needs": A MAPT protects your assets from Medicaid, but that does not mean it covers all your healthcare needs.
You would still need to provide for Medicaid's other eligibility requirements and may have to purchase additional long-term care insurance.
Case Studies: Real-World Applications of MAPTs
Case Study 1: Protecting a Family Home
John and Mary were a married couple in their early 70s, with a home valued at $300,000 and $150,000 in savings. Following John's diagnosis of early-stage Alzheimer's disease, they had been concerned about the potential costs of long-term care.
They had asked their attorney for suggestions regarding how they could protect their home and savings; he recommended the creation of a Medicaid Asset Protection Trust.
They transferred the home and $100,000 of savings into the MAPT and left $50,000 in liquid assets to pay for immediate needs.
Five years later, John's condition had worsened, and he needed nursing home care. Because of the MAPT, their home and savings were protected, and John was qualified for Medicaid without having to spend down their entire estate.
Case Study 2: How to Work with the Look-Back Period
Her accumulation totaled $500,000, plus she had a vacation home that added another $200,000 in value.
She was highly concerned about the ever-rising costs of long-term care. Sarah sought protection of her assets with a MAPT. She finally did something when she turned 68 years of age, which was two years before her unexpected health issue that required her to have care.
Because Sarah put her assets into the trust during the Medicaid look-back period, she faced a severe penalty.
Medicaid applied a penalty period-a period of time during which Sarah would not be eligible to receive any benefits.
The lesson in this example is that it is important to plan ahead and establish a MAPT long before one requires any level of care.
Other Considerations: Taxes, Estate Planning, and MAPTs
Approaching a Medicaid Asset Protection Trust, think about how it will fit into the overall estate planning strategy.
Tax Consequences: While the assets in the MAPT are protected from Medicaid, they don't avoid all other taxes.
Capital gains taxes can be imposed upon the sale of appreciated assets. However, a properly drafted MAPT preserves the step-up in basis in those inherited assets, which may minimize the amount of capital gain tax your heirs have to pay.
Integration into Estate Planning: The MAPT should be one part of a comprehensive estate plan that is integrated with other estate planning documents, including a will, powers of attorney, and healthcare directives, to provide complete management for your financial and medical affairs according to your wishes.
Long-Term Care Insurance: You can supplement your MAPT with long-term care insurance. Although a MAPT will protect your assets, long-term care insurance provides the actual means to pay for care, making Medicaid less essential.
What is the role of the trustee in a Medicaid Asset Protection Trust?
The trustee is indeed an indispensable component in the success of the MAPT. They are supposed to manage the assets according to the terms of the trust, and they ensure the trust follows the rules of Medicaid. In choosing a trustee, following are some qualities to consider:
Trustworthiness: He should be somebody one implicitly trusts since he will hold so much control over one's assets.
Financial Acumen: It should be somebody with some good understanding of financial management and investment strategies that could handle the assets under the trust.
Knowledge of Medicaid Rules: This professional should be aware of all rules and regulations concerning Medicaid, accordingly refraining from actions that might affect your eligibility.
Ability and Willingness to Serve: Management of a trust is a monumental task. Make sure the person you appoint is not only willing but also can serve in that position for an extended time.
Final Thoughts
In this case, a Medicaid Asset Protection Trust may be extremely helpful to you in trying to protect your assets and qualify for Medicaid when you need long-term care. It's not a solution for everyone. A MAPT should be created under the guidance of an experienced elder law attorney who can help one determine what one's specific needs are, what their current financial situation is, and what their long-term objectives are.
Key Takeaways:
Plan ahead: With the five-year look-back, it's best to set up a MAPT well in advance of needing long-term care.
Understand the trade-offs: While a MAPT offers considerable asset protection, there are trade-offs, including loss of control and potentially harsh Medicaid penalties if not timed correctly.
Work with Professionals: Many legal and financial issues go into the setup of a MAPT. Working with professionals will ensure that your trust is set up properly and integrated into your broader estate plan.
By taking the time to carefully weigh your options and plan well in advance, you can protect your assets, qualify for Medicaid, and provide for your loved ones long after you're gone.
