Medicaid Asset Protection Trusts, sometimes called Irrevocable “Income Only” Trusts or Medicaid Trusts, are used to protect assets and allow people to qualify for Medicaid long-term care. In order to protect the assets, the trust must be created 2.5 years before home care Medicaid is needed or 5 years before nursing home care is needed.
How Does a Medicaid Trust Work?
A Medicaid Asset Protection Trust is an irrevocable trust. Any assets placed in the trust are considered completed gifts to the beneficiaries, protecting the assets from Medicaid – after the requisite look back period. In New York State, an irrevocable trust can be revoked with the consent of the beneficiaries and the grantor. However, once a Medicaid Asset Protection Trust is revoked, the assets are no longer protected.
The grantor of a Medicaid Trust must name someone other than the Grantor or the Grantor’s spouse as Trustee. Although this means that the Grantor is giving up control, the Grantor has the ability to remove and replace any trustee and retain a limited power of appointment which allows the Grantor to change the beneficiaries of the Trust. If the Grantor owns a home, he or she can retain the right to live in the home rent-free for their entire life – with the spouse having the same right. This “life estate” allows the grantor to continue to receive any property tax exemptions, like STAR. Any assets in the trust also get a full step up in basis at the grantor’s death – avoiding capital gains tax.
The Grantor is not entitled to principal, or corpus, of any assets placed in an Irrevocable Trust. While the Grantor cannot use the principal of the Trust, he or she can receive all income (interest, dividends, rental income, etc.) that the Trust assets may generate. Since the Grantor must appoint a separate (non-spouse) individual(s) to act as Trustee of the Trust, it is the Trustee’s role, and not the Grantor’s, to invest the assets held by the Trust. Since the Grantor retains some control over assets in the Medicaid Trust, it is considered a grantor trust and the grantor is taxed on any income – even though a separate tax id number is used for the trust.
When an Irrevocable Trust is created, assets that the Grantor wants to protect are then retitled in the name of the Trust. This is what we call “funding the trust.” Assets can include anything from a checking or brokerage account to the title of one’s residence. Individual Retirement Accounts do not get retitled into the name of the Trust since they are already protected for Medicaid purposes by law – so long as the required minimum distribution is taken.
Often Grantors will place their home in the trust, some liquid assets, and name a child as trustee and not think about it for years. Most trusts provide that upon the death of the first spouse, the income interest continues for the benefit of the surviving spouse. At the passing of the surviving spouse, the assets are distributed to beneficiaries just as they would be in a will. An added benefit is that upon the Grantor’s death, the Trust does not go through the probate process and is instead administered without court intervention.
When Are the Assets Protected?
Since the transfer of assets to the Medicaid Asset Protection Trust is a “gift”, a certain period of time must pass before the assets are protected. This is because Medicaid imposes a “look-back” period when someone applies for Medicaid. Medicaid imposes strict income and asset guidelines and once an applicant meets these guidelines, Medicaid asks the question, “well, what happened to your assets?” The look-back for Community Medicaid is 2.5 years and 5 years for Chronic Medicaid. A Medicaid applicant discloses the existence of the Medicaid Asset Protection Trust – it is not hidden from the government in any way.
Deciding whether a Medicaid Asset Protection Trust is right for a client depends on a number of factors: funds available for long-term care, relationship to intended beneficiaries, and timing. No two clients are alike, which is why it is important to meet with an experienced medicaid attorney to evaluate which plan best achieves your personal goals and alleviates your concerns.