Madison Eubanks

May 22, 2024

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Is a Medicaid Trust Right For You or Your Clients?

Typically, we think of an estate plan as an arrangement to maximize wealth transfer and minimize taxes after a person passes away. However, there are some elements of estate planning that can take effect while a person is still living—like a Medicaid trust. 

In this article, you’ll learn what trusts and Medicaid have to do with one another, the advantages and disadvantages of Medicaid trusts, as well as when it may be appropriate for your clients to set one up. 

What is a Medicaid asset protection trust (MAPT)? 

A Medicaid asset protection trust—also known as a Medicaid trust or a MAPT—is a type of irrevocable trust that might be used in estate planning if a client or their spouse believes they will need long-term care at some point in the future. These trusts may be used as part of a strategy to qualify for Medicaid long-term care benefits, either alone or to supplement long-term care insurance  if their insurance coverage is not sufficient. 

By law, people must fall below a certain wealth threshold to qualify for Medicaid long-term care assistance. This means that, if a person who exceeds that level of wealth needs long-term care, they do not qualify for Medicaid and must pay for care out of their income or savings. The purpose of a Medicaid trust is to allow a client to avoid this situation. 

After enough time has passed (generally five years), the assets a client transfers into a Medicaid trust won’t be counted toward their Medicaid eligibility, allowing them to qualify for Medicaid long-term care coverage and preserve their savings. 

The rules vary from state to state, but generally Medicaid eligibility is based on a combination of income and resource tests. There are also certain non-financial qualification criteria like citizenship status, state of residence, age, or parenting status. Medicaid is administered by each individual state, and eligibility requirements vary depending on where the client lives. 

How does a Medicaid trust work? 

There are many types of assets that can be transferred into a Medicaid trust including primary residences, qualified life insurance policies, personal assets, investments, and more. 

It’s important to note that a Medicaid Asset Protection Trust is an irrevocable trust, so the trust cannot be dissolved and assets cannot be retrieved or controlled by the grantor.  

In order to be effective, a MAPT generally must have been established at least five years before the client or their spouse applies for long-term care coverage. However, if Medicaid benefits are needed before the five year waiting period is over, the client may be subject to a penalty period in which they are disqualified from Medicaid coverage. This penalty period varies based on the amount of assets transferred into the MAPT and the average cost of nursing home care in the state, as determined by Medicaid. 

Benefits of a Medicaid trust

As mentioned, the primary benefit of a Medicaid asset protection trust is to enable a person to qualify for Medicaid coverage while preserving their estate for future beneficiaries. If a person who exceeded the wealth threshold wanted to qualify for coverage but did not set up a Medicaid trust, they would likely have to spend their assets on care until they were depleted and then apply for Medicaid. 

Additionally, some states enforce Medicaid estate recovery, in which a decedent’s estate can be required to reimburse the government for long-term care costs. A Medicaid trust can protect against this. 

Disadvantages of a Medicaid trust

Like any trust, there are a few important considerations to keep in mind. 

First, as noted previously, a Medicaid asset protection trust is irrevocable, and the grantor gives up control of the assets transferred into it. If a client has any doubts about permanently transferring assets to the ownership of a trust, this may not be an appropriate strategy for them. Establishing a trust can be expensive, and some clients will not be in a financial position to do so. 

Additionally, there is a five year look-back period in which assets in a Medicaid trust would still count toward coverage eligibility. If the grantor needs to enter long-term care before the five years have passed, they will not qualify for Medicaid benefits. 

Finally, while no one can predict the future, it’s important to consider the likelihood that a client or their spouse will need long-term care such as a retirement or nursing home. Encourage clients to have these conversations with their families before deciding to set up a Medicaid trust. For example, a child or grandchild might volunteer for an aging parent to move into their home for care when the time comes rather than planning for a facility. The circumstances will vary client by client, but it’s important to discuss different future outcomes when considering an irrevocable Medicaid asset protection trust. 

Find more estate planning strategies to know here.