What is a Medicaid Asset Protection Trust? - Federal Lawyer
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What is a Medicaid Asset Protection Trust?

Among the many different asset protection tools that are available, one of the least well known is the Medicaid asset protection trust. While forming a Medicaid asset protection trust can offer a variety of benefits, many people simply don’t know that this option exists. As a result, they make decisions that do not serve their (or their loved ones’) best interests, and they unknowingly (and unnecessarily) put themselves in the position of being eligible for Medicaid benefits in their later years.

Nick Oberheiden
Attorney Nick Oberheiden
Medicaid Asset Protection Trust Team Leadenvelope iconContact Nick
Alina Veneziano
Attorney Alina Veneziano
Medicaid Asset Protection Trust Team Lead
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John W. Sellers
Attorney John Sellers
Medicaid Asset Protection Trust Team Lead
Former DOJ Trial Attorneyenvelope iconContact John

So, what is a Medicaid asset protection trust? How do they work, and when should you form one (if you should form one at all)? Keep reading to find out what you need to know:

Medicaid Asset Protection Trusts: An Overview

A Medicaid asset protection trust is a type of irrevocable trust that is designed specifically to preserve individuals’ Medicaid eligibility. Medicaid covers the costs of nursing home care for eligible individuals, with eligibility being determined based on financial need.

However, with the costs of nursing home care continuing to increase each year, even many well-off individuals who have done well saving for retirement don’t have the assets they need. Paying for nursing home care will quickly exhaust their savings—not only leaving them without a financial safety net, but also leaving them without a financial legacy to leave to their children.

This is where a Medicaid asset protection trust comes into play.

When you form a Medicaid asset protection trust, placing assets into the trust removes them from your personal wealth—at least as far as Medicaid is concerned. Reducing your wealth below the Medicaid eligibility threshold opens up access to Medicaid, which can fund your need (or your spouse’s need) for nursing home care should such a need arise in the future.

5 Important Facts About Medicaid Asset Protection Trusts

While the concept behind Medicaid asset protection trusts is fairly straightforward, there are several considerations involved in deciding whether forming one of these trusts is right for you. Like all asset protection tools, while Medicaid asset protection trusts offer several benefits, these benefits come with certain drawbacks and limitations. With this in mind, here are five important facts about Medicaid asset protection trusts:

1. Medicaid Uses a Five-Year Look-Back Period to Determine Eligibility

When you apply for Medicaid, your eligibility isn’t just based on your financial circumstances at the time you apply. Instead, Medicaid uses a five-year look-back period for making eligibility determinations. This means that if you form a Medicaid asset protection trust less than five years before you need to apply for Medicaid, your trust might not serve its intended purpose—at least not right away.

This isn’t necessarily a drawback, but more something to keep in mind as you make decisions in the present with an eye toward the future. While you might not be concerned about your Medicaid eligibility right now, this is your opportunity to be thinking ahead. If you are concerned that you might need to rely on Medicaid for nursing home care down the line, it is worth going ahead and scheduling an appointment with an attorney to discuss creating a Medicaid asset protection trust.

2. It Generally Isn’t Possible to Obtain Sale Proceeds from Assets Placed Into a Medicaid Asset Protection Trust (While the Trust Remains in Effect)

Once you place assets into a Medicaid asset protection trust, your ability to sell these assets is restricted. In fact, it may not be possible to sell certain assets placed into the trust at all until after the trust expires. This can be an important consideration if you are concerned that you may need (or want) to sell assets that you intend to place into the trust during your lifetime.

However, while you may not be able to sell assets that you place into a Medicaid asset protection trust during your lifetime, you can still benefit from them in other ways. For example, if you place your home into your trust, you can still live in your home as you normally would, and the trust can still sell the home—you just won’t be entitled to the proceeds directly. Instead, the sale proceeds will go back into your trust, to be used for the purchase of another residence or to be invested in other ways. With all types of investments, even though you generally won’t be able to sell them and use the proceeds to cover personal expenses, you can still re-invest through your trust, and you are entitled to distributions of income generated from the trust’s investment activities (including dividends and capital gains).

3. Certain Assets Are Ineligible to Be Transferred to a Medicaid Asset Protection Trust

Although many types of assets are eligible to be transferred to a Medicaid asset protection trust, there are some exceptions. For example, individual retirement accounts (IRAs) and qualified retirement plans cannot be transferred to a Medicaid asset protection trust. Thus, if you own these assets—and if these assets put you over the Medicaid eligibility threshold—you may need to consider liquidating some of your retirement funds in order to reduce your assets, fund your trust, and establish Medicaid eligibility.

While this can have undesirable tax consequences, in some cases it will be the best option overall. In the right circumstances, liquidating retirement assets in order to establish Medicaid eligibility will more than offset the tax penalties of early withdrawals. It is also possible to have the early withdrawal penalty waived in some cases.

4. Medicaid Asset Protection Trusts Are Irrevocable Trusts

As we mentioned above, a Medicaid asset protection trust is a specific type of irrevocable trust. As the name suggests, these trusts are generally irrevocable during the grantor’s lifetime. This means that once you establish a Medicaid asset protection trust, you are in it for the long haul. While the terms of your trust will dictate who receives the trust’s assets after your death, you will be limited to receiving income from the trust to supplement your Medicaid benefits and any income from other sources.

With this being the case, is it worth establishing a Medicaid asset protection trust, or should you go ahead and gift assets to your children, charities, or other beneficiaries until your remaining assets fall below the Medicaid eligibility threshold? As you may have guessed, there are several benefits to forming a Medicaid asset protection trust in comparison to this type of alternative. One of these benefits is your ability to receive income from the trust. Additionally, while you may not be able to directly access the assets in your trust, you still retain a certain amount of control—and your trust provides a certain amount of protection. In contrast, if you give your assets away, you will relinquish control; and, if the recipient doesn’t have an asset protection strategy in place, your former assets will be at risk from various types of claims.

5. There Are Costs Involved and, in Some Cases, Alternatives Available

Finally, there are costs involved in establishing a Medicaid asset protection trust. For many people, incurring these costs will be worth it—and the costs will be far outweighed by the Medicaid benefits they receive. But, if the amount of assets you need to remove from your estate to establish Medicaid eligibility is fairly low (i.e., under $100,000), you may have better alternatives available. Some examples of potential alternatives to forming a Medicaid asset protection trust include:

  • Setting up an irrevocable funeral trust
  • Spending down your “excess” assets
  • Opening a Medicaid compliant annuity
  • Transferring assets to your spouse (who then refuses to make these assets available for long-term care)
  • Using a “half a loaf” strategy, which combines gifting with a Medicaid compliant annuity

Should You Form a Medicaid Asset Protection Trust?

When planning for the future, it is critical to carefully weigh all of your options and make an informed decision with your anticipated long-term needs in mind. If establishing a Medicaid asset protection trust is your best option, then this is the option you should choose. If it isn’t your best option, you will need to work with an attorney who can help you make the right choice and take the necessary steps to protect your assets while also making sure you are Medicaid-eligible.

Our attorneys assist individuals and couples with implementing comprehensive asset protection strategies. If you have questions about forming a Medicaid asset protection trust, the alternatives to forming a Medicaid asset protection trust, or any other aspect of preserving your wealth for the future, we can help. Along with Medicaid planning, we provide other asset protection services as well—from forming domestic and offshore asset protection trusts to reviewing annuities, insurance policies, and other contracts.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd
Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester
Brian J. Kuester

Former U.S. Attorney

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara
Linda Julin McNamara

Federal Appeals Attorney

Aaron L. Wiley
Aaron L. Wiley

Former DOJ attorney

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (DOJ)

Chris Quick
Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow
Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Schedule a Complimentary Consultation at Oberheiden P.C.

Would you like to know more about forming a Medicaid asset protection trust and the alternatives that you may have available? If so, we invite you to get in touch. To schedule a complimentary consultation at Oberheiden P.C., please call 888-680-1745 or tell us how we can contact you online today.

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