When Should You Consider Funding a Medicaid Asset Protection Trust?

  • Medicaid
February 21, 2022

A Medicaid Asset Protection Trust can be a complex asset protection trust to understand. While it has many benefits, there can also be some drawbacks, so it’s important to know when and why this type of trust may be beneficial.

The biggest benefit of the Medicaid Asset Protection Trust is that it allows an individual to qualify for Medicaid while protecting their assets, thus offering an alternative to long-term care insurance. Long-term care insurance can be costly and hard to qualify for in some cases.

The funding of a Medicaid Asset Protection Trust has many tax benefits in comparison to simply gifting assets to loved ones to spend down your assets in order to qualify for Medicaid. If you need to remove assets from your countable estate for Medicaid purposes and choose to simply gift those assets to loved ones, there will be negative tax consequences.

Specifically, you may owe gift tax on the transfer. But more importantly, the asset will lose its step-up in basis for tax purposes. This could result in capital gains taxes when the asset is sold. However, if you put the asset in the Medicaid Asset Protection Trust, no gift tax will be due at the time of the transfer and the asset will receive the step-up in basis upon your death.

One drawback to a Medicaid Asset Protection Trust is that you will lose a significant amount of control over the assets placed in the trust. As the Grantor of the trust, you can be the income beneficiary, but you will relinquish the right to remove any of the trust principal. However, the Grantor can still receive any income earned in the trust.

A Medicaid Asset Protection Trust is most appropriate for individuals who have no immediate healthcare crisis, and Medicaid is not currently needed. The Medicaid Asset Protection Trust allows a person to protect some, or all, of their assets by putting those assets into an irrevocable trust while they are healthy and of sound mind.

This is appealing to individuals that wish to have options when it comes to controlling what portion of their assets they can use to pay for their care. However, it’s best to obtain advice from a lawyer regarding future scenarios and the possibility of running out of money should you encounter a serious health problem that would exhaust your own funds or be outside of the scope of their alternative insurance coverage. Should the need for Medicaid be imminent, this trust may be able to protect some, but not all, of your assets.

As previously mentioned, this trust can impact your Medicaid eligibility. Therefore, it’s important to be aware of the potential implications of Medicaid’s five-year lookback period as it applies to this type of trust. Essentially, Medicaid can look back over a period of up to five years when determining if a person qualifies for coverage.

That means that you will need to create the trust, transfer the assets to it, and not have a need for Medicaid for at least five years. After the five-year mark of the funding of the trust, you will be fully protected and will qualify for Medicaid.

Setting up a Medicaid Asset Protection Trust can be a complicated process. However, the attorneys at Jorgensen, Brownell & Pepin, P.C. can answer your questions regarding the benefits and drawbacks of these trusts and can assist you through the process.

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