A Medicaid trust can help ensure you receive the necessary medical care at an affordable rate later in life. Find out how to set up one and how it benefits you.
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What is a Medicaid Trust and Why Do You Need One?

Your folks are getting older, retiring from their careers a few years ago. Now, long-term medical care is a significant concern with your dad’s heart condition. It all seems complicated between Medicare, Medicaid, a Medicaid trust, and supplemental insurance.

You’ve heard the horror stories. One of your friends at work had to get her mom into a nursing home. It turns out before she could get any help from Medicaid, most of her mom’s assets had to be spent.

With the median cost of a nursing home running right around $100,000 per year, there’s no way your parents could afford that for very long. So what are the options?

How can your parents get Medicaid assistance without going broke in the process? The answer might be a Medicaid Asset Protection Trust (MAPT). Let’s look at what is a Medicaid trust and how they work.

What a Medicaid Trust Does

Before we get into trusts and Medicaid, remember that Medicaid is a federal program administered by the states. Each state will have slightly different rules, limits, and procedures., so remember, ‘contact a Medicaid lawyer near me.’

A Medicaid trust is a form of irrevocable trust designed to protect certain assets if the creator – your mom or dad – needs to apply for Medicaid.

Protecting Their House

Yes, and here’s an example. Your parents own their house, and they rent out the garage apartment. Medicaid will be considering the house as principal, but the rent they receive for the apartment is income.

With a MAPT, your parents can live in the house for life, but they can’t sell it or transfer the ownership to anyone else. Only the trustee (usually the creator’s adult children – you) can do that.

The trust can choose to assign the income to your parents – or not. If the income goes to your parents, then it counts towards their Medicaid limits.

Your parents have the option of assigning other assets to the MAPT, including stocks, bonds, and bank accounts.

The Five-Year Rule

Medicaid generally has a five-year look-back period, though a few states are more lenient. Protecting the assets means setting up the trust more than five years before applying for Medicaid is critical. 

If gifts or asset transfers occur within the five-year period, then Medicaid will apply penalties delaying the start of Medicaid. But again, remember, the penalties vary slightly by state.

Let’s say your dad decides to give you $10,000 within the five-year look-back period. When your folks decide to apply for Medicaid and place your dad in a nursing home, Medicaid won’t be happy.

Medicaid will say that $10,000 could have been used to help pay for the home, penalizing your parents by delaying the start of Medicaid benefits.

Who’s Involved in a MAPT

In setting up a MAPT, the creator – your parent – most typically names adult children as the trustees. They are responsible for controlling and managing the trust for the creator’s benefit for the remainder of the creator’s life.

Naming the creator (or their spouse) as a trustee for the MAPT isn’t allowed. The only control the creator has is to change the trustee if they are unhappy with the original trustee for some reason.

Let’s look at a standard MAPT scenario. The trust is being set up so that the parents receive any income from the assets held by the trust. They also have exclusive rights to the use and possess their home for the rest of their lives.

Who Should Setup a MAPT

As a general rule, people should consider contacting a Medicaid attorney if they own their own home and have other significant income-producing assets. Dividends from stocks and rental income are examples.

In broad terms, while giving up control, the creator still benefits from the assets and can continue living with the same lifestyle.

When to Setup a MAPT

If your parents are considering setting up a MAPT, sooner rather than later is the rule. Immediately after legally creating the MAPT, Medicaid’s infamous five-year look-back clock starts running down.

What that means is that once titles to the assets have been transferred to the trust, the clock starts. After five years have passed, the assets are fully protected from the Medicaid spend-down.

Earlier setup is crucial for seniors who are anticipating significant medical expenses – or the need for long-term care – later in life. And that includes most of us.

According to the numbers, 70% of adults now 65 years old will need some form of long-term care later in life.

Remember that early is better than later when setting up a MAPT.

MAPT Disadvantages

It’s certainly true that the benefits of MAPTs outweigh the disadvantages for most people. That said, it’s essential to have a clear understanding of the flip side.

Without getting confused by all of the specifics, people considering setting up a MAPT should remember one thing. Once the assets are transferred into the trust, they have given up control. Forever.

For that reason, it’s vital the trustee be someone they trust. The simple fact is that the trustee has the right to sell or transfer the assets once the MAPT is created.

For that very reason, many Medicaid attorneys recommend that liquid assets (bank accounts, for instance) not be placed in the trust.

Setting up a MAPT

If you think a Medicaid trust is suitable for your purposes, then be sure to work with an experienced Medicaid or elder law attorney.

Because they vary state by state, the attorney needs to know the specific Medicaid rules and regulations in the state where the trust is established.

Structuring the trust itself means looking at both spouses’ ages, income, health, assets, living arrangements, and more.

MAPT: Right for Your Parents

Now that you’ve looked at what a Medicaid trust is, you’ll have a better idea of whether it makes sense for you. The most significant upside is that it lets your parents maintain their current lifestyle and stay in their home.

Don’t forget the five-year look-back rule! If you do decide to set up a MAPT, remember, sooner is better!

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