Medicaid Asset Protection Trusts – A Tool for Long-term Care Planning
Americans are living longer and longer after retirement, meaning more years of not earning income via work and instead needing to live on retirement savings.
It also means a greater chance of needing long-term care over their extended lives. According to the Department of Health and Human Services, 7 out of 10 of us reaching 65 years of age are expected to need some type of long-term care during our lifetimes.
And the cost of long-term care is increasing at an alarming rate. Data from the Kaiser Family Foundation and the AARP put the cost of such care back in 2018 as an estimated $849 billion dollars (up 17% from 2017), possibly ballooning to as much as $2.5 trillion by 2030.
Stats such as these keep some people up at night. Others may just assume that Medicaid will be there to step in immediately and foot the bills, and often it is. But if you are counting on that, it’s important to know that to be eligible for Medicaid long-term care coverage, your so-called “countable assets” must be below a very low level. That level varies among states, but in most (including Arkansas) that ceiling is only $2,000.
Some assets are exempt from this requirement. In Arkansas, this includes mostly personal property and other assets of nominal value, as well as personal homes that you live in or have an “intent to return” and are below a certain net value. However, financial assets and most other assets owned by individuals are non-exempt and count toward the low ceiling.
The practical effect of this is that before Medicaid kicks in providing benefits, these non-exempt assets must be used up to provide your care or otherwise spent down below the ceiling. Complicating this is that your countable assets may include assets you no longer own, such as those you may have given away to children or other family members. This is because of the 60-month Medicaid Look-Back Period designed to discourage people from gifting assets to meet the asset limit. Essentially, Medicaid checks to make sure no assets were transferred to someone else for less than fair market value during the 60-month look-back period. If they were, Medicaid coverage can be delayed.
Enter the fray a planning tool called the Medicaid asset protection (or preservation) trust, or MAPT. A MAPT is an irrevocable trust to which assets can be transferred to shield them from the Medicaid rules. Properly designed and timed (i.e., at least five years before applying for Medicaid long-term care benefits), Medicaid agencies will not count MAPT assets towards the ceiling, all the while preserving the assets for posterity and still giving you, the grantor of the trust, some measure of control over their ultimate disposition. Further, there is no limit on the value of the assets that can be placed in a MAPT.
But why bother with a trust? Why not just gift the assets outright to your heirs? There are several reasons why a MAPT may be favored over a simple gift.
For one thing, when a gift is made, the recipient takes the asset at the tax basis of the giver. If the asset has appreciated in value and is sold, then the recipient is taxed on the appreciation. Contrast this to an inherited asset where the heir’s tax basis “steps up” to the fair market value of the asset at time of inheritance, and when sold, the appreciation at time of death is exempt from tax. According to legal experts in the field of Medicaid planning, a MAPT can be drafted such that funding it is considered a completed gift for Medicaid purposes, but not for tax purposes, thus preserving the basis step-up. Kind of the equivalent of having your cake and eating it too.
A second advantage is that a gift in trust protects the heirs by protecting the assets from their creditors (including disgruntled ex-spouses), prevents them from simply squandering the assets and helps the heirs avoid Medicaid issues of their own.
The grantor can also include a “limited power of appointment” that gives the grantor the ability to change trust beneficiaries should they desire or need to do so in the future. This ability has income tax saving implications as well. The grantor can also be given the right to change trustees of the trust, who, according to Frank Dudeck, Esq., who specializes in the field, can and are often the children of the grantor.
And finally, a personal residence can be put into the trust with a provision allowing the grantors to live in the home for the remainder of their lives, while, if drafted properly, still preserving the generous home sale income tax exclusion.
The use of a MAPT is potentially very valuable to you and your family but is a complex planning tool that requires careful planning and drafting. You should only do so in consultation with legal professionals that specialize in this area of law, so be sure to ask questions about their background and expertise before engaging.
More information about these and other Medicaid eligibility rules for Arkansas can be found at www.medicaidplanningassistance.org/medicaid-eligibility-arkansas.
