How a trust can help you get long-term care from Medicaid

A guide to Medicaid trusts

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In the United States, most seniors will need some form of long-term care, which can be quite expensive — long-term nursing homes cost anywhere from $75,000 to $150,000 per year, and they are not covered by Medicare.

High-net worth individuals with a lot of money (or people who planned ahead) will not have trouble paying for this care, and people with low incomes can get nursing home coverage through Medicaid. Those in between may find it more difficult to come up with the money, or they may have the funds saved away for their loved ones’ inheritance.

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In an ideal situation, long-term care insurance would help pay these assisted-living costs, but if you don’t already have a policy and you’re over 60 years old, the premiums may be prohibitively expensive.

If you earn too much to qualify for Medicaid but not enough to afford long-term care, one option is to open a Medicaid trust. You can transfer assets into this special type of trust — also known as Medicaid protection trust (MAPT), Medicaid qualifying trust, and home protection trust — to meet Medicaid's financial eligibility requirements and qualify for the program’s long-term care benefits.

Key Takeaways

  • Medicaid can pay for long-term care, but it has financial eligibility requirements

  • You can transfer your assets into a special type of irrevocable trust called a Medicaid trust to qualify for benefits

  • All asset transfers into a Medicaid trust are subject to a look-back period (typically five years), so it is best to plan in advance

  • Medicaid trust assets and funds are also protected from estate recovery

An important part of estate planning, a Medicaid trust can help people preserve their savings, or an inheritance set aside for children and loved ones, instead of paying for assisted living. We’ll discuss the benefit of opening a Medicaid trust, including what assets it can hold.

How Medicaid covers long-term care

Medicaid is a federal insurance program for low-income and vulnerable Americans. In addition to providing the essential health benefits that all health insurance plans must offer, Medicaid can also cover the costs of long-term care. But in order to qualify for Medicaid, you must meet certain eligibility requirements based on income and resources.

Income is any money you receive, including employment wages, Social Security payments, SSDI payments, pension payments, and more.

Resources are financial assets, like a savings account or rental property. We’ll talk more in depth about the different types of assets and which ones count towards your Medicaid eligibility later.

To qualify for Medicaid, your income and assets must fall under a certain amount; if you exceed either limit then you won’t qualify. Every state runs its own Medicaid program, so the exact income and resource limits and what counts towards them will vary. For a single applicant, the income limit might be anywhere from $800 to over $2,000 a month, depending on the state. The total of all resources must usually be limited to $2,000, but can be much higher, like nearly $15,500 in New York. You can refer to this state-by-state guide to Medicaid for more detail.

The resource limits are higher if both an applicant and their spouse are applying for Medicaid. When one spouse is not applying for Medicaid (called the community spouse), they might be able to claim a greater portion of the shared assets by filling out paperwork, so that they won’t affect Medicaid eligibility of the spouse who is applying.

You can also speak with an attorney in your area who specializes in elder law for assistance, since the rules may be complicated. (Medicaid nursing home eligibility requirements may differ from general Medicaid eligibility requirements and income may be calculated differently when applying for Medicaid if you are age 65 or older.)

Medicaid spend-down

If you make more money than Medicaid’s income limit or the worth of your assets exceeds the resource limit, then you will not be eligible for benefits. But you can implement a financial strategy to “spend down” your income or assets so that you qualify.

To spend down your income you can use excess money over the limit towards medical expenses. To spend down your assets, you would sell them and similarly use the profits for medical bills. (Keep in mind that when you sell off your assets, you might have to pay capital gains taxes.) Some people might simply give their assets to loved ones to meet the resource limit. (This might result in a gift tax if you give over the $15,000 gift tax exemption. The exemption will rise to $16,000 in 2022.)

“Spending down” income or assets is a common strategy for qualifying for Medicaid. But if you don’t want to prematurely gift or sell your assets just yet, you can transfer your assets into a trust instead.

What is a Medicaid trust?

A trust is a legal entity that can hold money and assets and distribute them to beneficiaries. The trust maker (also known as the grantor or settlor) will transfer or retitle their assets in the name of the trust. They will choose someone to manage the trust, called a trustee, and also name trust beneficiary who should receive any of the funds in the future.

When creating a Medicaid trust, it is of utmost importance that the trust is irrevocable, meaning that it can’t be changed. With an irrevocable trust, the grantor (settlor) gives up the ability to modify the trust. Once this is done, the trust owns the assets for all tax purposes and Medicaid eligibility will be unaffected.

Just as a special needs trust allows disabled individuals to qualify for government benefits, a Medicaid protection trust similarly holds assets so that an elderly individual can receive Medicaid nursing home benefits.

What assets should I put in the Medicaid trust?

When you apply for Medicaid, not all of your assets will count towards the resource limit, which is different in every state.

Typically you don’t have to worry about the following assets, since they will not affect your eligibility for Medicaid:

  • Retirement accounts, like a 401k and traditional IRAs that are currently paying out

  • Funeral or burial expenses up to a certain limit

  • Personal belongings and valuables

  • A car

  • A house under certain conditions, such as when it is a primary residence of the applicant or the applicant’s spouse, or if the equity is under a certain amount

  • Some types of life insurance, if the face value is under a certain amount.

Instead, your countable assets include savings and checking accounts, CDs and money market accounts, stocks, bonds, and real estate property other than your primary residence. If you need to qualify for long-term care coverage and the combined value of your countable assets exceeds the resource limit for your state, then you should transfer assets into a Medicaid trust until the value of your remaining assets is below the resource limit.

→ Learn more about trust property and who owns it

Medicaid look-back period

If you quickly transfer assets in anticipation of qualifying for Medicaid, you will be disqualified because of the look-back period. The transfer of assets should happen at least five years (less in some states) in advance so that they are fully protected.

One benefit is that the look-back period can be “prorated.” For example, if transferred assets into a trust four years ago and then go into the nursing home, you would have to pay for it yourself for the first year but the next year you would be covered by Medicaid long-term care.

What is not a Medicaid trust

Not all trusts will help you qualify for Medicaid. As previously mentioned, the trust must be irrevocable. Any trust that you can amend or cancel, like a revocable living trust, will not help you qualify for Medicaid. The grantor (settlor) still owns the assets in this type of trust and will need to claim them on their tax return. If you need a trust, you can get one through Policygenius to create one using attorney-approved tools. While these trusts are revocable, they still allow you to pass assets along to your heirs after you die.

Any trust you set up where you (or a spouse) act as the trustee is most likely be viewed as a “grantor trust” (which falls under revocable trusts) in the eyes of the IRS, and will not retain the Medicaid asset protection capabilities you want.

Given the complexities and rules a Medicaid trust, you may want to seek a professional like an estate planning attorney. they can help draft the trust document and give you some guidelines to follow. Note that some irrevocable trusts may also be grantor trusts, so they may not help your Medicaid eligibility.

→ Learn more about if a living trust can protect assets from a nursing home

How much does a Medicaid trust cost?

Setting up an irrevocable trust can cost anywhere from a few hundred to thousands of dollars, if you have a lot of assets to transfer. (Though if that’s the case, then you may be able to pay for a nursing home without the help of Medicaid!)

Your trust may also have to pay annual management or custodian fees if you opt for an accountant, lawyer, or brokerage firm to act as a professional trustee, which can reduce the value of the funds (and thus lower your loved ones’ inheritance).

While setting up a trust can be expensive, it may be worthwhile in the long term given the high cost of long-term care.

→ Learn more about how much a trust costs

Can Medicaid take your trust assets?

If you are a Medicaid beneficiary, the state can actually try to recoup payments for certain expenses, including a long-term care facility, after you pass away. This is known as estate recovery.

Medicaid won’t try to recover payments if you leave behind a spouse or a child who is under 21 years old or who is blind or disabled. (States may also waive Medicaid estate recovery in certain circumstances, depending on the state’s own laws.)

However, assets in a properly set up irrevocable Medicaid trust are protected from Medicaid estate recovery.