What is a Medicaid Asset Protection Trust (MAPT)?
When you think about estate planning, do not overlook eligibility for Medicaid. Many are of the mindset that they can avoid formal estate planning and still be eligible for Medicaid. The biggest mistake that people tend to make is transferring assets to their children to protect them, more often than not this is the family residence. However, by completing these transfers several problems are created.
If a transfer between the parent and child occurs three years prior needing to enter a nursing home, Medicaid will deny coverage in a five year look back.
The exception may be if the child had lived with their parent for at least two years prior to their parent needing to enter the nursing home; in this case it may be possible to transfer the home to the child based on the Child Caregiver Exception. Be aware that with the home now being in the child’s name, if the child is married and divorces, the value of the house may be divided between the child and their ex-spouse. As well if the child were faced with any financial problems, the house is now their asset and creditors could place a lien on the house.
A Medicaid Asset Protection Trust is exactly what it sounds like, a trust that will protect the home from being counted or considered in the Medicaid eligibility. A Medicaid Asset Protection Trust allows a person to qualify for long term care benefits from Medicaid. The MAPT trust in turn will also protect assets from becoming depleted in the event long term-care is needed.
In order to qualify for Medicaid, it is required that household assets as a whole be under a certain level. Rules regarding asset levels are strict, and again there is a five year look back period to see if an individual will qualify.
As long as the trust has been created with all assets being transferred five year prior to applying for long-term benefits from Medicaid. The applicant will not be penalized for transferring assets, and the existence of the trust will not impact their eligibility for Medicaid.
In the event that Medicaid benefits are needed before the expiration of the five-year look-back period, a disqualification penalty period can be applied before Medicaid benefits would be received. After the five-year look-back period, as long as all the assets are owned by the trust, Medicaid cannot count the assets, and these assets cannot be counted or seized to reimburse long term costs.
So what changes for you with establishing a Medicaid Asset Protection Trust (MAPT)?
When you place your assets in the MAPT, your primary residence is protected, you can continue to occupy your residence just as you did prior to establishing the trust; you are simply transferring the ownership from yourself to the trust.
If you transfer any investment assets to the trust, you as the former owner may not sell the investments, however you may continue to receive any income generated from those investments. This is allowed because a MAPT can be designed as an income-only trust.
IRA accounts and/or qualified plans cannot be transferred into your trust. So, it may be required to liquidate some or all of your retirement tax-deferred accounts in order to fund the MAPT.
Know that all MAPT’s are irrevocable trusts, so once you place assets into the trust, you lose control of the assets. Don’t let this scare you, just go into the MAPT with a long-term plan for the assets and their eventual transfer to other family members.
A MAPT is not the only way to protect the family home from Medicaid.
To protect your home from Medicaid’s “estate recovery” and protect your surviving spouse and their ability to stay in your home, sometimes it makes sense to simply transfer your home to your spouse who doesn’t require long-term care. Certain assets are not countable for Medicaid eligibility. Under federal law, a spouse who is well may own and continue to remain in your home. Your spouse may also be able to retain a limited amount of assets, but the limits are strict.
Know that there are certain individuals who the house could be transferred to without penalty:
A child under 21 who is blind or disabled.
A trust for the “sole benefit” of a disabled individual under age 65.
A sibling who has lived in the home for two years before the Medicaid applicant moves into a nursing home who already owns an equity interest in the home, or
A “caretaker child”, a child of the Medicaid applicant who has lived in the house for at least two years before the applicant moved into the nursing care facility and provided care that allowed the person to stay home instead of being moved into a facility.
If the house is sold by the person on Medicaid benefits while in the nursing care facility, they will become ineligible for Medicaid and the proceeds of the sale of the house may have to be used to pay the bills for the nursing care facility.
A life estate is another strategy that some have used to try and become eligible for Medicaid. However, there is some risk to this strategy. If the home is placed into a life estate and then sold while the owner is still living and that owner is receiving Medicare, the value of the life estate may have to be reimbursed to Medicaid.
Consider the following before establishing an MAPT:
Neither you or your spouse may be a beneficiary of the trust principal. The trustee and/or your beneficiaries must be on the same page in terms of how the asset will be used, maintained and when it may be sold or if it will be passed onto an heir.
In some states, you may legally serve as your own trustee, but that may bring additional scrutiny over your trust. If your property generates income, any income you receive would need to be passed on to the nursing care facility.
Also know that tax implications are unique, depending on the situation.
If you have further questions, or wish to schedule a consult, feel free to reach out to our office at legacylawgroupcolorado.com