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Understanding the Pros and Cons of a Medicaid Asset Protection Trust

At Surprenant & Beneski, where we serve estate planning clients throughout Southeastern Massachusetts, we consider Medicaid Asset Protection Trusts (MAPTs) a valuable tool when it comes to long-term healthcare. Although not always right for everyone, a MAPT is often useful in preserving assets while maintaining Medicaid (MassHealth) eligibility. 

Because Medicaid, not Medicare, is the government benefit that pays for prolonged nursing home care, having a MAPT can save families an enormous amount of money if a loved one becomes permanently incapacitated and requires round-the-clock care.

MAPTs Require Astute Estate Planning

Being covered for long-term nursing care requires pre-planning. Since Medicaid is based on financial need and has a 5-year look-back period, one of the primary goals of a MAPT is to preserve Medicaid eligibility. By transferring your assets into a trust, you remove them from your ownership so they will no longer affect your eligibility for Medicaid benefits. 

Advantages of Medicaid Asset Protection Trusts

There are several benefits to having a MAPT which is why so many clients gravitate towards them.

1. Supplemental Funds Are Still Available

Even though the trust funds are no longer in your name, our capable attorneys can assist you in structuring the trust to pay out a supplemental income to make your life considerably more pleasant. These payouts can provide resources for uncovered medical expenses and enhance your lifestyle with easier transportation, additional clothing, books, outings, restaurant meals, and other treats. 

2. Asset Protection from Creditors

Transferring assets into a MAPT not only keeps your money in the trust out of the hands of Medicaid but also protects your assets from other creditors and potential lawsuits.

3. Tax Benefits

Your MAPT can be structured to minimize estate taxes since the trust removes your assets from your taxable estate. Because estate taxes are only incurred by estates of over $1,000,000, this advantage is beneficial only to those with high-net-worth estates.

4. Designating a Beneficiary of the Trust

A MAPT also allows you to designate the beneficiary who will receive what remains of the trust when you die, greatly diminishing the need for probate. More than that, because the funds will remain in the trust when you pass away, your beneficiary’s inheritance will be protected from their creditors, including an ex-spouse if they divorce. You can also stipulate how your beneficiary may use the trust, for example for education or paying off a mortgage on their home.

5. Protection From Capital Gains Taxes

A MAPT can offer capital gains tax advantages through the “step-up in basis,” by allowing assets to be revalued at the time of the trustor’s death, potentially reducing or eliminating capital gains tax for heirs. The trust structure preserves the primary residence exclusion (up to $250,000 per individual, $500,000 per couple).

Potential Pitfalls of MAPTs

While MAPTs provide many benefits, they also have drawbacks that make some clients uneasy.

1. The 5-Year Look-Back Can Work Against You

If you have not started estate planning early enough or if you become incapacitated prematurely, a MAPT may not be a workable solution since if the look-back rule has been violated, a penalty period before eligibility will be established. 

2. Income From a MAPT Is Countable 

Although assets in a MAPT may not be counted toward your resource limit by Medicaid, these assets may still generate enough income to cause you to exceed the income limit in Massachusetts.

3. Loss of Control

For some people, relinquishing direct control over the assets put into a MAPT is unsettling. You may not be willing to commit to the inability to make any changes to the principal in the trust, even if you can receive income from it. “Irrevocable” is, in some cases, and for some people, an unacceptable concept.

4. Cost and Complexity

Establishing a MAPT involves legal fees and possibly the ongoing costs of trust management. Some clients want to keep their estate planning methods as simple as possible.

5. MAPTs Are Inappropriate for Some Assets

While real estate and liquid assets work well in MAPTs, retirement and pension plans typically will not. IRAs and 401(k)s generally present negative tax implications.

6. Medicaid Does Not Cover All Long-Term Care

Medicaid does not pay for assisted living homesteads which many clients prefer to nursing care facilities. If you opt for long-term care in a private, upscale assisted living facility, a MAPT trust will not be helpful.

Contact Our Experienced Trust Attorneys Today

The issue of Medicaid Asset Protection Trusts is a complex one that requires a consultation with a first-rate elder law attorney who understands your financial and familial situation in depth.

Contact us now so we can guide you to the best solutions for you and your family.