What is a medicaid asset protection trust?

On Behalf of | Jun 2, 2023 | Estate Planning

In Pennsylvania, planning for the expenses related to long-term health care can become daunting, especially considering rising costs. To address the need for financial resources to cover long-term care costs while protecting family assets, some people choose to establish a Medicaid asset protection trust (MAPT). This type of trust offers certain benefits, although it may not suit people who need more flexibility.

Who qualifies for long-term care coverage through Medicaid?

Unlike federal Medicare, Medicaid is a joint federal and state-run program, and the rules for qualifying may differ between states. Individuals must meet specific financial and medical criteria, which include the value of assets held jointly with their spouse.

The assets counted for qualification include money in bank accounts, stocks and bonds and property. The primary residence and certain types of personal property may fall in the exempt category, depending on income and asset rules and limits for a person’s state.

Defining a MAPT

A Medicaid asset protection trust protects a family’s assets while adjusting their finances so that they can increase their chances of qualifying for Medicaid benefits. MAPTs are irrevocable trusts which transfer assets out of the owner’s name.

The assets become owned by the trust, which removes them from the amount of assets counted by Medicaid. However, the individual cannot alter the irrevocable trust once established, limiting their financial flexibility if circumstances change. It is crucial to consider this trade-off of giving up control over assets and having limited access to the principal in the trust in exchange for meeting the Medicaid means test qualifications.

Some MAPT Pitfalls

Setting up a MAPT and choosing which assets to transfer to it requires careful thought. Medicaid has a “look-back” period that counts assets sold or gifted within the past two and a half to five years if disposed of below market value. Including these assets can disqualify individuals from receiving Medicaid.

Some individuals may want to cash out retirement accounts and place the proceeds into the trust to meet the Medicaid threshold, but this plan can have expensive tax consequences and, in most cases, does not make good financial sense.

Additionally, state laws, elder law and relevant regulations may change in future years, and individuals may no longer qualify for Medicaid. States are also challenging the legality of Medicaid trusts, which can seriously disrupt the financial strategy for individuals who make the trust a significant part of their long-term financial plan.

Long-term care and hybrid insurance policies may offer a more flexible solution to individuals looking for alternatives to MAPTs.

A MAPT could provide a viable option for your financial situation. However, it is crucial to carefully assess the risks and consider alternatives to make informed decisions about your long-term care planning.

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