Most seniors in the United States will need some form of long-term care, which doesn’t come cheap — nursing homes can cost up to $100,000 per year, and they are not covered by Medicare.
High-networth individuals (or people who planned ahead) may not have trouble affording a nursing home, and people with low incomes can get coverage through Medicaid. But those in between may find it more difficult to meet these costs, or they may prefer to use their hard-won savings in other ways — like leaving them to family members as an inheritance.
In an ideal situation, you'd have long-term care insurance to help pay for assisted-living, but if you don't already have a policy and you're over 60 years old, the premiums may be prohibitively expensive.
Another option is to open a Medicaid trust, which can help if you earn too much to qualify for Medicaid but not enough to afford long-term care on your own. By transferring assets into this special type of trust — also known as Medicaid asset protection trust (MAPT), Medicaid qualifying trust, or home protection trust — you can meet Medicaid's financial eligibility requirements to qualify for the program's long-term care benefits.
Medicaid can pay for your long-term care, but it has financial eligibility requirements.
You can transfer your assets into an irrevocable Medicaid trust instead of conducting a “spend down.”
All asset transfers to a Medicaid trust are subject to a look-back period (typically five years), so it is best to plan in advance.
Medicaid trust assets are protected from estate recovery.
What is a Medicaid trust?
A Medicaid trust is an irrevocable trust that holds onto your assets to help you qualify for Medicaid long-term care if you don’t meet the eligibility requirements. An important part of estate planning, Medicaid trusts can help you preserve your savings, or an inheritance set aside for children and loved ones, instead of using it to pay for long-term care.
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. They will choose someone to manage the trust, called a trustee, and also name a trust beneficiary who should receive any of the funds in the future. Once this is done, the trust owns the assets for all tax purposes and the grantor's 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 in the future.
→ Learn about other types of trusts
What is not a Medicaid trust
Not all trusts will help you qualify for Medicaid. Any trust that you can amend or cancel, like a revocable family trust, will not help you qualify for Medicaid, since the grantor still owns the assets in this type of trust and will need to claim them on their tax return.
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 may not help you retain Medicaid benefits either.
Revocable trusts can still benefit most people by passing down assets while avoiding probate. But if you need a Medicaid trust, you should speak with a local estate planning attorney. They can help draft the trust document and make sure it follows all the rules to help you qualify for Medicaid where you live. Some irrevocable trusts may also be grantor trusts, so they may not help your Medicaid eligibility.
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, including a nursing home. But in order to qualify for Medicaid, you must meet certain eligibility requirements based on your 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. Different types of assets count towards your Medicaid eligibility.
If you exceed either the income or resource 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 Medicaid 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 over $15,000 in some states. 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 or Medicaid planning 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.)
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. 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 (which might result in gift taxes or capital gains taxes), you can transfer your assets into a trust instead.
How much does a Medicaid trust cost?
Setting up an irrevocable trust can cost anywhere from a few hundred to thousands of dollars, depending on the makeup of your assets and estate.
Your trust may also have to pay annual management or trustee 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
What assets should I put in a Medicaid trust?
If you need to qualify for Medicaid long-term care and the combined value of your countable assets exceeds the resource limit for your state, then you should transfer your assets into a Medicaid trust until the value of your remaining assets is below the resource limit.
Countable Medicaid assets that you should put in your trust can include:
Savings and checking accounts
CDs and money market accounts
Stocks and bonds
Real estate property other than your primary residence
Typically you don't have to worry about the non-countable assets, since they will not affect your eligibility for Medicaid. Non-countable assets include 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 primary residence that belongs to you or your spouse, a primary residence if the equity is under a certain amount, and some types of life insurance, if the face value is under a certain amount.
→ Learn more about trust property and who owns it
Look-back period for Medicaid trusts
You need to transfer assets into the trust at least five years (less in some states) in advance so that they are fully protected from being counted toward your Medicaid resources. If you quickly transfer assets in anticipation of qualifying for Medicaid, you will be disqualified because of the look-back period.
One benefit is that the look-back period can be "prorated." For example, if you transferred assets into a trust four years ago and then went into a nursing home, you would have to pay for the cost in the first year, but the next year you would be covered by Medicaid long-term care.
→ Read about whether you should put your house in a trust
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 constructed irrevocable Medicaid trust are protected from Medicaid estate recovery.
→ Learn more about if a living trust can protect assets from a nursing home