How to Protect Assets from a Medicaid-Required Spend-Down

by | Oct 29, 2022 | Estate Planning

Many people rightly worry about what happens if they have to go into a nursing home and they don’t have long-term care insurance. They’ve heard stories about people who had to spend down their entire nest egg before they could qualify for any government benefits. The stories are true, and it happens all the time, but it’s not your only option.

Most states have asset protection trusts specifically designed to protect your hard earned money, stocks, and other assets from being attached by the government to pay for your care. These are known as MAPTs or Medicaid Asset Protection Trusts. These trusts limit what assets the government can count as eligible funds that must be used to pay for your care. MAPTs enable someone who would otherwise be ineligible for Medicaid to become eligible and receive the care they require, either at the family home or in a nursing home. Assets in this type of trust are no longer considered owned by the Medicaid applicant. There are some limitations to these trusts, though.

If you enter into a nursing home or care facility less than 5 years after having created and put assets into the trust, Medicaid will “look back” that 60 months in Tennessee, New York, and Florida (5 years) and deny care based on what your estate looked like 5 years prior, and those assets will be made available to the government to pay for your care. Even if you transfer the title of your property to someone else, the government can “undo” that transfer, especially if it was for less than market value. But as long as you create the trust, fund it, and then go into care at least 5 years after, those assets will not be counted as part of your estate.

When your primary residence is put into a MAPT, you may continue to live in hour home as you always have. If investment assets (like a brokerage account, for example) are transferred to the trust, you may not sell the investments, but you may continue to receive income generated from those investments, which would be used to pay for your care. A MAPT can be designed as an income-only trust. Retirement plans and IRA accounts cannot be transferred to a trust, so liquidation of some or all of the applicant’s retirement tax-deferred accounts may be the only way to fund the MAPT, which could have tax consequences. We recommend you speak with your accountant about this strategy.

All MAPTs are irrevocable trusts, so once assets are placed in the trust, the owner loses control of the assets. The owner cannot be the trustee or the beneficiary. As mentioned before, they can continue to benefit from the income of that asset while alive, but they cannot sell the asset and use the proceeds or trade that asset for another. A person should not transfer assets into a MAPT without a long-term plan for how that asset will transfer to other family members.
A MAPT is not the only way to protect the family home from Medicaid spend down requirements. To protect the family home from Medicaid “estate recovery,” and protect the surviving spouse’s ability to stay in the home, sometimes it makes sense to transfer the home to the spouse who is not anticipated to need long-term care, because certain assets are not considered countable for Medicaid eligibility. Under federal law, a spouse may own and remain in the family home, even when an unwell spouse needs long-term care paid for by the government. A limited amount of assets may be retained by the spouse too, but the limits are strict. 

There are other classes of individuals to whom the house could be transferred without penalty, as well:
• A child under age 21 who is blind or disabled, 
• A trust for the “sole benefit” of a disabled individual under age 65,
• A sibling who has lived in the home for two years before the Medicaid applicant’s move into a nursing home who already owns an equity interest in the home, or
• A “caretaker child,” a child of the Medicaid applicant who has lived in the house for at least two years before the applicant moved into the nursing care facility and provided care that allowed the person to stay home instead of being moved into a facility.

Note, that if the house is sold by the person receiving Medicaid benefits while in a nursing home, they could become ineligible for Medicaid, and the proceeds of the sale of the house may have to be used to pay the nursing home bills.

Some people try to use a life estate (titling of real estate) to become eligible for Medicate, but there are some risks associated with doing this. If home is placed in a life estate and then sold while the owner is still living and receiving Medicaid benefits, the value of the life estate may need to be reimbursed to Medicaid.

Neither the grantor (person who puts assets in the trust) nor the grantor’s spouse may be a beneficiary of the trust principal (not the income). The trustee and beneficiaries must agree about how the asset will be used, maintained, and when it may be sold, or if the intent is for it to be given to an heir. The MAPT is usually drafted to preserve the donor’s ability to occupy the family home for his or her lifetime, and the ability to change the beneficiaries who will receive the trust property. 

In some states, the grantor may legally serve as their own trustee, but that may create additional scrutiny of the trust and may not be recommended. The government prefers that it really be a “hands off” type of asset. If the property generates income, any income received would need to be forwarded to the nursing home. Tax implications are all unique, depending upon the situation, so we always have a conversation with our clients’ accountants to ensure we are following a smart tax plan. 

If you’re healthy now, but concerned about possibly needing government-funded long-term care in the future, the time to start planning is now, due to the look-back periods this article mentions. We’re happy to guide our clients through the process of Medicaid and special needs planning. Fill out our INTAKE FORM today and we’ll set up a short phone call to discuss your concerns.