What is a Medicaid Asset Protection Trust?

Medicaid Asset Protection Trusts (MAPT) can be a valuable planning strategy to meet Medicaid’s asset limit when an applicant has excess assets. This type of trust enables someone who would otherwise be ineligible for Medicaid to become Medicaid eligible and receive the care they require be at home or in a nursing home.
Medicaid Asset Protection
As its name suggests, an asset protection trust is designed to protect your assets. But, if designed correctly, this legal tool can serve other purposes as well. Typically, we think of creating an asset protection trust when someone is planning to apply for Medicaid. 

While assets can be transferred to family members or friends, there are often risks and disadvantages to doing so. In addition to the obvious issue of the trustworthiness of the individuals involved, there are risks that cannot be calculated.

For example, will any of the individuals incur a debt or liability that exposes the transferred assets to collection by a creditor? Will any of the individuals get divorced, or pre-decease you? Also, low-basis assets (e.g., a house that was purchased many years ago for a price that is much less than its current fair market value) have the same low basis in the hands of the persons to whom they were transferred.

With a trust, upon your death, the same assets can be distributed to the same individuals, but now with a “step up” in basis to fair market value, resulting in your beneficiaries avoiding capital gains tax on the increase in value that accrued during your lifetime.

When a trust is properly designed to provide asset protection, the assets transferred to it no longer belong to you. As a result, they are beyond the reach of Medicaid or any other future creditor.

Medicaid has a 5 year look back period

For this reason, the trust is often called a “Medicaid Trust.” Be aware, however, that transfers to a trust—just like transfers to individuals—are subject to Medicaid’s five-year “look back” period. 

For an elderly person to be eligible for nursing home care, assisted living or in-home care from Medicaid, they must have limited income and assets. To prevent candidates from simply giving away their money to qualify for Medicaid, the federal government implemented the “look-back period”.

The look back is a set period of time prior to the individual’s application during which the Medicaid administering agency reviews all the financial transactions that the senior has made. If a transaction is found in violation of the look back period’s rules, the applicant will be assessed a penalty. Penalties come in the form of a period of time that the applicant is made ineligible for Medicaid. Meaning they will not be able to receive care services paid for by Medicaid for a certain number of months.

A Medicaid applicant is penalized if assets (money, homes, cars, artwork, etc.) were gifted, transferred, given away or sold for less than the fair market value. The reason for this penalty period is that these assets could have been used to help cover the cost of long-term care if they had not been gifted or transferred.

When Applying for Medicaid

You must disclose the amount of your assets and when you made the asset transfers. Medicaid can question any transfer within the look-back period. If you didn’t get something of at least equal value in return for a transfer, you’ll be ineligible for Medicaid. The look-back period is 5 years for transfers made after February 8, 2006, the date the DRA went into effect.

Ineligibility Period

Asset transfers during the look-back period trigger the ineligibility period. The length of the ineligibility period is calculated by dividing the amount transferred by the average monthly cost of nursing home care in your area. For example, if you transfer $75,000 and the average cost of nursing care in your area is $3,000 per month, your ineligibility period is 25 months. The period begins to run on the date you apply for Medicaid.

The best-case scenario is for the elderly person to transfer assets and be able to stay out of a nursing home until the look-back period expires. If only it were so simple to follow that plan. These rules can be confusing at best and can affect the type of care you or your loved one receives.

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