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What is a Medicaid Asset Protection Trust?

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The idea of Medicaid Asset Protection Trust for the purposes of protecting against long-term care costs is becoming both more sought-after and more necessary.

Not all trusts protect assets if you enter a nursing home: A Medicaid Asset Protection Trust (MAPT) is designed to provide this protection.

As the number of people aged 65 plus continues to increase, more seniors realize they must address the cost of long-term health care, which can quickly devour assets intended for retirement or inheritances. Those who can prepare in advance do well to consider asset protection trusts, says the article “Asset protection is a major concern of aging population” from The News Enterprise.

Medicaid Asset Protection Trusts are irrevocable trusts in which another person manages the trust property, and the person who created the Trust—the grantor—is not entitled to the principal within the Trust. There are several different types of irrevocable trusts used to protect assets.

As a side note, Revocable Living Trusts are entirely different from Irrevocable Trusts and do not provide long-term care asset protection to grantors. Grantors placing their property into Revocable Living Trusts maintain the full right to control the property and use it for their benefit, meaning any assets in the Trust are not protected during the grantor’s lifetime.

Medicaid Asset Protection Trusts are irrevocable, and grantors have no right to principal other than possibly residing in a home transferred to the Trust. The person creating the Trust should not serve as a trustee, further limiting the grantors’ access to the property in the Trust. Grantors may, however, reside in the home or any other future home purchased by the Trust.

During the grantor’s lifetime, trust income is generally taxed at the grantor’s tax bracket rather than at the much higher trust tax bracket. Upon the grantor’s death, beneficiaries receive appreciated property at a stepped-up tax basis, avoiding a hefty capital gains tax.

While the term “irrevocable” makes some people nervous, most IDGTs have built-in flexibility and protections for grantors. One provision commonly included is a Testamentary Power of Appointment, which allows the grantor to change beneficiary designations.

A MAPT also includes clauses providing the grantors’ exclusive right to reside in the primary residence. However, if the grantor needs to change residences, the trustee may buy and sell the property within the Trust as required.

To protect Long term care, the transfer must be held in the Trust for five years before applying for the government to pay the bill. It is not a crisis planning alternative unless the family can pay the bill while waiting to get to five years for the application process.

Beneficiary: lifetime and after-death beneficiaries. Lifetime beneficiaries will receive value from the real estate upon the grantor’s death. Lifetime beneficiary provisions are important because they allow the grantor to make gifts from the trust principal. Hence, at least one person can always receive the trust principal if need be.

Medicaid Asset Protection Trusts are complicated and require the help of an experienced estate planning attorney. However, when used properly, they can offer protection from unanticipated creditors, long-term care costs, and even unintended tax liabilities.

Reference: The News Enterprise (March 4, 2023) “Asset protection is a major concern of aging population.”