A Medicaid asset protection trust — commonly called a MAPT — is a type of irrevocable trust specifically designed to protect assets from Medicaid’s spend-down requirements while allowing the grantor to potentially qualify for Medicaid long term care benefits. It is one of the most powerful and widely used tools in Medicaid planning and elder law.
By transferring assets into a Medicaid asset protection trust more than five years before applying for Medicaid those assets are generally no longer counted toward Medicaid’s asset eligibility limits. This allows individuals and families to protect a significant portion of their life savings while still qualifying for Medicaid coverage of nursing home or other long term care costs.
How a Medicaid asset protection trust works
When a person creates a Medicaid asset protection trust they transfer ownership of assets — typically their home, investments, or savings — into the trust. At that point those assets are owned by the trust rather than by the individual. Because the individual no longer legally owns the assets they are generally not counted toward Medicaid’s asset eligibility limits.
The trust is managed by a trustee — typically a trusted adult child or other family member — who has legal authority to manage the trust assets but must do so according to the terms of the trust document and in the best interests of the beneficiaries.
The grantor typically retains the right to receive income generated by the trust assets — such as interest, dividends, or rent — but gives up access to the principal. This means the grantor cannot take money out of the trust or sell trust assets for personal use once the trust is funded.
The five year look-back period
The most important timing consideration for a Medicaid asset protection trust is Medicaid’s five year look-back period. When a person applies for Medicaid long term care benefits the state Medicaid agency reviews all asset transfers made during the previous 60 months — five years. Transfers of assets into a MAPT during this period may trigger a penalty period of Medicaid ineligibility.
However assets transferred into a MAPT more than five years before applying for Medicaid are generally outside the look-back window and are not counted toward eligibility. This is why early planning is so critical — the sooner a MAPT is created and funded the sooner the five year clock starts running.
What assets can be placed in a Medicaid asset protection trust
A wide range of assets can be transferred into a Medicaid asset protection trust including:
- The primary residence — one of the most common and important assets transferred into a MAPT
- Investment accounts and brokerage accounts
- Bank accounts and savings
- Vacation homes and rental properties
- Business interests in some cases
Retirement accounts such as IRAs and 401(k)s generally cannot be transferred into a MAPT because doing so would trigger immediate income taxes. Retirement accounts require separate planning strategies.
Protecting the family home
One of the most common uses of a Medicaid asset protection trust is to protect the family home from Medicaid estate recovery. When a Medicaid recipient dies the state may seek reimbursement from their estate for the cost of Medicaid benefits paid — a process called Medicaid estate recovery. The family home is often the most valuable asset subject to estate recovery.
By transferring the home into a MAPT more than five years before applying for Medicaid the home may be protected from both Medicaid’s asset eligibility calculations and estate recovery after death. The grantor can continue to live in the home after transferring it into the trust and typically retains the right to do so as long as they wish.
What the grantor gives up
Creating a Medicaid asset protection trust requires giving up significant rights. Once assets are transferred into the trust the grantor:
- Cannot take back the assets or access the principal
- Cannot sell trust assets and keep the proceeds
- Cannot change the beneficiaries without the trustee’s consent in most cases
- Has given up ownership of the assets permanently
This loss of control is the primary drawback of a Medicaid asset protection trust. It is an irrevocable decision that should be made carefully and only after thorough consultation with an elder law attorney.
Income from the trust
Most Medicaid asset protection trusts are structured as grantor trusts for income tax purposes. This means that income generated by trust assets — such as interest, dividends, and rental income — is reported on the grantor’s personal income tax return rather than on a separate trust tax return. It also means the grantor can continue to receive this income.
However the income the grantor receives from the trust is counted as income for Medicaid purposes. When the grantor applies for Medicaid nursing home benefits the income from the trust will generally be applied toward the cost of care as part of the patient pay amount.
Capital gains tax and the step-up in basis
One important tax advantage of a Medicaid asset protection trust relates to capital gains taxes. When assets held in the trust are eventually inherited by the beneficiaries they typically receive a stepped-up tax basis equal to the fair market value of the assets at the time of the grantor’s death. This means that if the beneficiaries later sell the assets they pay little or no capital gains tax on the appreciation that occurred during the grantor’s lifetime.
This is a significant advantage compared to giving assets directly to family members during the grantor’s lifetime in which case the recipients inherit the grantor’s original lower tax basis and may owe substantial capital gains taxes when they sell.
Medicaid asset protection trust vs outright gifting
Some people consider simply giving assets to family members rather than creating a Medicaid asset protection trust. Comparing the two approaches reveals important differences:
- Look-back period — both outright gifts and transfers into a MAPT are subject to Medicaid’s five year look-back period
- Control — outright gifts transfer complete ownership to the recipient who can do whatever they want with the assets. A MAPT retains some structure and allows the grantor to specify how assets are managed and ultimately distributed.
- Asset protection — assets given outright to family members are subject to the recipient’s creditors, divorce proceedings, and poor financial decisions. Assets in a MAPT are protected from these risks.
- Tax basis — outright gifts carry the donor’s original tax basis. Assets inherited through a MAPT receive a stepped-up basis at the grantor’s death.
- Estate recovery — outright gifts made more than five years before applying for Medicaid are generally protected from estate recovery. Assets in a MAPT are also generally protected.
Who should consider a Medicaid asset protection trust
A Medicaid asset protection trust may be worth considering for people who:
- Are concerned about the potential cost of future long term care
- Want to protect their home or other significant assets from Medicaid spend-down and estate recovery
- Have sufficient time before potentially needing Medicaid — ideally more than five years
- Are willing to give up access to the principal of the assets transferred into the trust
- Want to preserve an inheritance for their children or other heirs
A Medicaid asset protection trust is not appropriate for everyone. People who may need access to the principal of their assets for living expenses or other purposes should not transfer those assets into an irrevocable trust.
The role of the elder law attorney
Creating a Medicaid asset protection trust is a complex legal undertaking that should only be done with the guidance of an experienced elder law attorney. An elder law attorney can:
- Evaluate whether a MAPT is appropriate for your specific situation and goals
- Draft a trust document that complies with your state’s Medicaid rules and achieves your planning objectives
- Advise on which assets to transfer into the trust and which to retain outside of it
- Help coordinate the MAPT with other components of your estate plan
- Advise on the timing of the trust creation to maximize the benefit of the five year look-back period
Key terms to know
- Medicaid asset protection trust — MAPT — an irrevocable trust designed to protect assets from Medicaid spend-down requirements
- Look-back period — the five year period during which Medicaid reviews asset transfers when determining long term care eligibility
- Penalty period — a period of Medicaid ineligibility resulting from disqualifying asset transfers during the look-back period
- Grantor trust — a trust in which the grantor is treated as the owner for income tax purposes
- Medicaid estate recovery — the process by which a state seeks reimbursement from a deceased Medicaid recipient’s estate
- Step-up in basis — an increase in the tax basis of inherited assets to their fair market value at the time of the grantor’s death
- Patient pay amount — the portion of a nursing home resident’s income that must be applied toward the cost of care
Sources
- National Academy of Elder Law Attorneys — naela.org
- Medicaid.gov
- Internal Revenue Service — irs.gov
- USA.gov
This article is for general informational purposes only and does not constitute legal or financial advice. Medicaid asset protection trust rules vary significantly by state and are subject to change. Consult a licensed elder law attorney for guidance specific to your situation.