The Medicaid Asset Protection Trust – Is this Trust Right for you?

Many people face the prospect of needing to apply for public benefits through Medicaid or SSI by reason of mental and/or physical disability or incapacity.  With the costs of nursing home and long-term care ever-increasing, a Medicaid Asset Protection Trust (a “MAP” Trust”) is a planning option that can allow you to protect assets from Medicaid if you anticipate needing an assisted living facility, nursing home or other long-term care arrangement at some point in the future.

Generally speaking, assets which you transfer to a MAP Trust will not be counted as “available resources” for purposes of qualifying for Medicaid benefits after the expiration of five years following the date of your Medicaid application (referred to as the “Lookback Period”).  In some states, there may also be a lookback period for community Medicaid care (such as home aides or local programs).

However, when you transfer assets to a MAP Trust, you give up control over and access to those assets in order to avoid the assets being counted as your resources for Medicaid qualification purposes.  Since a MAP Trust is irrevocable, it is important to consider the benefits and drawbacks of implementing a MAP Trust to determine if this long-term care strategy will serve your needs and goals.

How a MAP Trust Works

An attorney will draft a MAP Trust.  The person creating the trust is the “settlor” or “grantor.”  You also name a trustee who will manage the trust assets for the benefit of the trust beneficiaries.  The beneficiaries usually are children and grandchildren, but can include anyone you choose.  The trust is irrevocable. 

The MAP Trust provides that the trustee can distribute the income and principal of the trust to the beneficiaries based on ascertainable standards (i.e., for their health, education, maintenance and support), or for any reason.  At your death, the assets generally would be distributed to the beneficiaries, either outright or in continuing trusts.

One important question in drafting the trust is whether you may be included as a permitted income beneficiary of the trust.  Each state has an applicable income threshold which, if exceeded, will disqualify you from receiving Medicaid benefits, and the income you receive from a MAP Trust could cause you to exceed this limit. 

If you transfer your home to a MAP Trust, you may continue to reside in the home.  Generally, there is an agreement between you and the trust whereby you reserve the right to live in the home rent-free.  You generally continue to pay the expenses associated with the home (such as real estate taxes and utilities).  The home is often a well-suited asset for transfer to a MAP Trust.

Pros of a MAP Trust

1.  Assets Not Deemed Available Resources for Medicaid.  Assets transferred to a MAP Trust will not be deemed available resources for Medicaid eligibility purposes after the expiration of the Lookback Period.

2.  Assets Are Protected from Medicaid Estate Recovery Claims.  Once you have transferred your assets to a MAP Trust and other criteria are met, including expiration of the Lookback Period, Medicaid will not be permitted to make a claim to compel the trustee to distribute assets to pay for your long-term care costs, or make claims against your estate for reimbursement of benefits previously paid on your behalf after you have passed away.  As a result, the assets in the trust can be preserved for your beneficiaries.

3.  Income Tax Deductions/Exclusions.  The MAP Trust generally is drafted to preserve certain tax benefits, such as a deduction for real estate taxes, the capital gains exclusion if you sell the home, and the ability to receive a step-up in basis at death, which allows the trust to sell the home after your death without incurring capital gains tax.

Cons of a MAP Trust

1.  Timing.  For a MAP Trust to accomplish its intended goal, the trust needs to be created well in advance of the time when you anticipate you might need long-term or institutional care, in order to allow sufficient time to satisfy the Lookback Period (eg, five years).  If you create a MAP Trust, then prior to the expiration of the Lookback Period you still will be responsible for long-term care costs until the Lookback Period has expired, and must budget for that.

2.  If You Are an Income Beneficiary.  As discussed above, if you are named as an income beneficiary of your MAP Trust and the assets generate income, your receipt of trust income may cause you to exceed the income limit permitted in your state. 

3.  Relinquishment of Control.  A trust will not qualify as a MAP Trust if you retain any form of control.  As such, you must be comfortable with (i) transferring a portion of your assets to the MAP Trust, (ii) no longer having any access to the assets owned in the MAP Trust (other than your right to reside in any home that is transferred to the trust) and (iii) relinquishing management and control of the trust and its distributions to the trustee, who will become the effective owner of the assets.  The decisions around which assets to use to fund the trust are very important.

4.  Quality of Care.  Although the MAP Trust technique is designed to preserve assets and wealth, it assumes that a person will rely on Medicaid to pay for a portion of his or her care.  However, not all long-term care facilities are covered by Medicaid, as many assisted living facilities only accept residents who are able to pay privately.  Thus, relying solely on Medicaid benefits could affect the choice and quality of care you may receive.

The benefits and drawbacks discussed above are not exhaustive and will vary according to each person’s specific circumstances.  

In deciding whether a MAP Trust is well-suited to you and your family, you should consult with an estate planning attorney to discuss the effects that a MAP Trust may have on other benefits you may receive, your overall estate plan and any estate tax consequences that may result.