While the average lifespan of both men and women has doubled in the past 100 years, it has introduced new costs and challenges surrounding retirement and health care.
It isn’t something we like to think about, but in 2023, The Department of Health and Human Services projected that more than 56% of those turning 65 will require some form of long-term care service. There are private insurance options to cover these costs, but for many, it’s either too late or too expensive. Medicaid provides long-term care coverage, but you first need to qualify, and the true cost of coverage is not as clear as it may seem.
A Medicaid Asset Protection Trust (MAPT) is a type of irrevocable trust specifically created and funded with Medicaid eligibility in mind. Rather than maintaining direct ownership of all assets and possibly needing to spend down a significant portion to cover the cost of care in the final years of your life, placing assets in an MAPT could make you Medicaid eligible, and protect those assets from possible Medicaid Recovery after your death.
This strategy is great if you’re approaching retirement or have parents that have already entered that phase of their lives.
Here are five things to consider when deciding to establish a Medicaid Asset Protection Trust to maximize your Medicaid benefit and leave a legacy to your family and loved ones.
1. Becoming eligible for Medicaid benefits
Medicaid eligibility is tied to your assets and monthly income, and that of your spouse if you’re married. Most states allow an individual to retain $2,000 in countable assets before becoming eligible for benefits. These “countable assets” include cash, stocks and other equity instruments, bonds and CDs, vehicles, and real property apart from your primary residence. All sources of income are considered, such as Social Security, investment income, pension payments or Required Minimum Distributions from an IRA or 401(k).
Placing your countable assets in an MAPT could reduce your monthly income and your countable assets to allow you, or your parents, to qualify for Medicaid benefits.
But wait, how are you supposed to cover expenses if your countable assets are in trust? One of the benefits of an MAPT is that the trustmaker, the individual establishing the trust for their assets, can receive income from the assets placed in trust. So, if you rely on dividend or interest income to maintain your lifestyle, you can continue to do so while reducing your countable assets.
2. Build a moat around your castle—Protect your home!
What you are protecting against is Medicaid Estate Recovery.
Imagine this situation: You are Medicaid eligible and receiving care in a nursing home. Your only remaining asset is your home, which you’ve owned for 60 years. After your death, even though you were Medicaid eligible and appropriately receiving a benefit, the Medicaid Estate Recovery Program can seize your home as a means of recouping the cost of your care. This situation is very common, and likely to occur in situations where an individual’s home is their largest and most valuable asset.
One strategy for avoiding this and retaining your home for your family and beneficiaries is to place your home in an MAPT. For many Americans, their home is their most valuable asset, and makes up the bulk of what they plan to pass on. That might represent hundreds of thousands of dollars today, and even more decades later at death.
While this strategy may not be useful for an individual that owns a $5 million or $10 million home, since they can likely afford to self-insure or purchase private insurance, they could technically still use the same strategy and ensure that asset passes on to their family and loved ones.
3. Avoid the dreaded ‘look-back rule’!
I know what you’re thinking, “Why do I need to do this today? Can’t I just gift assets to my children when my health starts to decline?”
While that may seem like a viable strategy, most states have a five-year (60-month) “look-back rule” when considering benefit eligibility. This means that any gifts or asset transfers within the five years preceding a claim for benefits will be considered as though the gift or transfer never left the estate. A violation of this look-back rule may also result in a time delay for receiving benefits, so best practice is to plan well in advance of any need.
Unfortunately, Medicaid Trusts are not exempt from the look-back rules. They are subject to the same five-year look back, which means you should place assets in trust well before any need arises. The best time to take advantage of these types of strategies was five years ago. The second-best time is today!
4. Review the rules of your state
While there are Federal guidelines that broadly cover Medicaid eligibility, the individual states can alter certain limits and requirements. For instance, every state sets a specific limit on the amount of monthly income an individual or couple can have to be Medicaid eligible. The same applies to assets owned, where some states allow you to exclude your primary home from consideration, others do not. Starting in 2024, the state of California no longer has an asset limit for eligibility purposes.
These are just a few examples, so be sure that you’re aware of any state-specific limits or rules by consulting a local estate planning attorney that specializes in Medicaid planning.
5. Avoid overplanning
Medicaid Trusts are irrevocable, meaning that assets placed in trust are considered to be outside of the grantor’s estate and no longer owned by the grantor. The trustee of the trust and the named trust beneficiaries (who are very often the same, be it a child or relative) now exercise control of the asset in trust and will have complete ownership of that asset after the grantor’s death.
While this fact is what provides many of the benefits of a Medicaid Trust, it’s also an important consideration for anyone thinking about using the strategy. The benefits may be numerous, but they may not outweigh the comfort and security that an individual finds in having full control over their assets and property.
Should you ultimately decide to use the strategy, it’s important not to overcommit to your plan, leaving you without the necessary assets or control to maintain your lifestyle. While the goal of Medicaid Trusts is to maximize your Medicaid benefit while maintaining as much of your assets for the next generation, in practice some of your income and assets may end up covering the costs of your long-term care. There is a point of maximum benefit, but falling just shy of that point will have been better than overcommitting and needing to unravel a complex legal web.