Long-term care requires full financial awareness for the care recipient and/or the individual’s family. Typically, long-term care is only paid for in a limited number of ways: private pay, long term care insurance, or through Medicaid eligibility. Neither Medicare nor private health insurance pay for long-term care costs. For almost all families who are not independently wealthy, payment for long-term care costs through private pay until exhaustion of assets, then qualifying for Medicaid is the principal method of payment.
For families that engage in Medicaid planning well before any actual need for long-term care, the principal planning strategy is a Medicaid asset protection trust (sometimes referred to as a MAPT), an irrevocable trust that is prepared early enough to bypass the five-year lookback period. The MAPT differs from a standard revocable trust or a living trust or other more typical estate planning tools in that these are irrevocable trusts, and separate legal ownership from the grantor for Medicaid eligibility purposes, and are not considered when calculating the Medicaid asset limit. If mental capacity of the grantor is a concern, a properly drafted power of attorney will give the attorney in fact the power to set up such a trust on the grantor’s behalf.
Under a MAPT, the prospective recipient is the grantor of the irrevocable trust. Another individual, most often adult children and/or other family members, serve as the trustee. Under the scenario, the grantor does technically give up legal control of the management of the assets. Medicaid requires this sacrifice of control in order to consider the assets unavailable to the grantor.
Financial assets as well as real estate (including the primary residence) can be transferred to the irrevocable trust. Once the assets have been transferred to the irrevocable trust, these assets are not considered countable assets, and the principal can still be used for the grantor’s benefit (if handled properly under the legal advice of an attorney with a qualified elder law firm). The funds can also be used for distributions for the benefit of loved one’s, family members or other beneficiaries thereafter without violating any gifting restrictions or invoking the five-year lookback period either.
If the 5 year lookback period is navigated, and the grantor then requires care, Medicaid would be available to pay for care without use of any of the assets transferred to the MAPT. Additionally, these assets would not be subject to estate recovery upon the death of the grantor.
In setting up a MAPT, family is intentionally beginning the five-year lookback period in the anticipation that the potential care recipient will not need nursing home care for at least 5 years. This type of estate planning requires a great deal of forethought. However, even if the grantor requires long-term care within the 5 year lookback period, significant asset preservation can be realized. If the grantor requires care within the 5 year lookback period, the MAPT need only pay for care until the end of the 5-year window. For example, if the grantor requires care 4 years into the lookback period, then the trust assets would only need to pay for care for 1 year before Medicaid eligibility could begin.
In addition to the Medicaid benefits of establishing a MAPT, these irrevocable trusts also create several other collateral benefits. The assets held by the MAPT will avoid probate upon the death of the grantor, automatically transferring full ownership to the owner’s beneficiaries at his or her death. Additionally, unless the trust is funded with several million dollars, neither gift taxes nor estate taxes are due upon the transfer or upon the death of the grantor.
Finally, it is important to note that the establishment of these Medicaid trusts can have income tax implications. Transfer of real estate in particular to an irrevocable trusts can have capital gains tax implications; step up in basis benefits can be affected. This can also affect primary residence capital gains exemptions if the grantor transfers assets improperly. Additionally, transfers of IRAs have special tax rules. Consultation with a CPA or a specialized elder law attorney or estate planning attorney may be necessary. However, in almost all cases, any negative potential tax consequences are dwarfed by the negative consequences of not engaging in planning. It is important to know, however, what exactly the tax consequences are as the family moves through Medicaid planning and begins to transfer assets for Medicaid planning purposes.
For families who think that care in nursing home might be required, but not in the immediate future, a Medicaid asset protection trust is a vital tool, potentially saving hundreds of thousands of dollars. And since such irrevocable trusts have been established prior to the five-year lookback period, they are typically not even required to be reported on the subsequent Medicaid application.