This article was originally published on Law.com on January 13, 2025

Regardless of recent challenges by local Department of Social Services offices, the Medicaid Asset Protection Trust (“MAPT”) is alive and well in the Elder law practitioner’s toolbox and is the best option for protecting real property. MAPTs have been the subject of much planning, advocacy and programming in the Elder Law and Special Needs Section.

A MAPT is a type of irrevocable trust that is usually drafted as a grantor trust for income and estate taxes. A MAPT is created to shield assets from being counted when applying for Medicaid eligibility, including Long Term Care. This is the program most utilized by Medicare recipients over 65 years old to assist with the costs of a long term stay in a nursing facility or for a home health aide.

Assets that commonly fund a MAPT include a primary or secondary residence, rental properties, shares of corporate entity, and non-qualified investments, to name a few. For many clients, placing real estate in this type of trust is a first step to Medicaid planning because it can protect the property and still allow the grantor the exclusive rights of use and occupancy or the ability to benefit from rental income.

Internal Revenue Code §§671-679 are known as the “Grantor Trust Rules.” Including one or more of these in the trust instrument makes the trust a grantor trust. For the MAPT, the drafter may include the Power to Control Beneficial Enjoyment or the Power to Add Charitable Beneficiaries, both under IRC §674(a). Both powers must be exercisable in a limited power of appointment over trust principal by the grantor, on their own, without the consent of an adverse party. Also under IRC §674, the Power to Remove and Replace a Trustee is commonly utilized to achieve grantor trust status. Perhaps the most commonly used rule in a MAPT is IRC §677, Income for Benefit of Grantor, which directs all income to be paid to, or used for the benefit of, the grantor or spouse. Determining which rule to use often comes down to drafter’s choice. The experience of the attorney draftsman and the county in which they are located are also factors.

To receive a step up in cost basis upon the death of the grantor, the property within the trust must be includable in the taxable estate of the grantor. Retaining the right to determine “who shall possess or enjoy the property or the income therefrom” achieves this goal. IRC §2036(a)(2). Similarly, giving the grantor the ability to determine the final disposition of the trust with a limited power of appointment will also result in the trust property being part of the gross taxable estate and, therefore, able to receive the stepped-up value at death. IRC Section 2038(a)(1).

In 2023, IRS Revenue Ruling 2023-2 was issued, causing a concern as to whether assets held in a MAPT will still enjoy the step-up in basis at death. The good news is, they do! If a trust is properly drafted pursuant to IRC §2036 and §2038, it will be included as part of the taxable estate of the grantor upon death and enjoy the step up.

By Britt Burner, Esq.

Britt Burner is a Partner at Burner Prudenti Law, P.C. focusing her practice on Estate Planning and Elder Law. She is currently serving as Chair of the Elder Law and Special Needs section of NYSBA and is on the Advisory Council of the Katz Institute of Women’s Health at Northwell.