The Benefits of Medicaid Asset Protection Trusts

Ideally, we'd all have the foresight and resources to plan ahead for the possibility of nursing home care in the future. The reality, of course, is that many of us don't have long-term care insurance, and very few people have the ability to set aside enough funds to pay for a stay in long-term care, especially since it typically costs upwards of $6,000 per month in Ohio, and often more.

As a result, at some point, most people in long-term care have the bill for that care paid by Medicaid. Of course, to qualify for Medicaid, your assets must be limited. But that doesn't have to mean that you must impoverish yourself and your family in order to get the care you need. While Medicaid does look at your assets and recent transfers of assets to determine if you qualify, some assets are not considered "countable" for Medicaid purposes. These include assets placed in a properly drafted Medicaid Asset Protection Trust (MAPT).

Why Choose a Medicaid Asset Protection Trust (MAPT)?

In addition to shielding assets from Medicaid and preserving them for your family, a MAPT has a number of advantages.

Some of these advantages are easy to see when the MAPT is compared to other ways people often try to protect assets from Medicaid. For instance, in order to preserve a family home, parents often transfer the deed to the home to an adult child. However, this is not always an effective choice, and can have disastrous consequences.

Protecting Assets from Dissipation or Children's Creditors or Divorce

Let's say you have a home worth $250,000 and you transfer it to your adult daughter. Two years later, you need to enter a nursing home, and one year after that, your funds run out. You will not qualify for Medicaid because Medicaid will "look back," see the transfer, and treat you as if you still possessed that $250,000 asset.

Furthermore, because the house is now in your daughter's name, it's also legally hers. That means that if she gets a divorce, her spouse may be awarded part of the value of the house. Or if she has creditors, they can legally treat the house as her asset in their efforts to seek repayment of her debts. If your daughter were so inclined, she could also mortgage the house if it were in here name.

A MAPT protects you and your family from these outcomes. A MAPT is an irrevocable trust, which means that when you transfer an asset into it, it no longer belongs to you and you cannot take it back. Because the house in this scenario has been irrevocably transferred to the MAPT, Medicaid cannot treat it as one of your assets. On the other hand, because it's not in your daughter's name, a bitter spouse or determined creditor of your daughter also cannot touch this property.

If your child lives with you and provides care, you may be able to transfer the home under the Child Caregiver Exception; ask your attorney to compare this option to the use of a MAPT.

Tax Benefits of MAPT versus Life Estate

Some people try to get around the problems inherent in an outright transfer of a home to their child by transferring the home, but reserving a life estate in it for themselves. But if the home is sold prior to the death of the parent receiving Medicaid, whatever the value of the life estate was will need to be reimbursed to Medicaid.

Also, with a life estate, the parent will lose much of their capital gains tax exclusion for the sale of their primary residence; they'll only be eligible to take a pro rata share based on the relative value of the life estate to the whole residence. If the parent is in a nursing home, and the family does not want to sell the house in order to avoid the Medicaid reimbursement mentioned above, the family could end up maintaining an unused property for months or years.

A properly established MAPT, on the other hand, will preserve the capital gains tax exclusion on the entire primary residence. Furthermore, if the property has appreciated over time, the home will have a higher stepped-up cost basis with the use of the MAPT, as the basis will be determined as of the parent's death, not as of the earlier transfer to the adult child. This will reduce or eliminate capital gains taxes on the ultimate sale of the home.

Continued Use of Trust Property and Income from Trust Assets

With a MAPT, you have the ability to use the trust property, so you can continue to live in the house just as before it was transferred into the trust. MAPTs also offer flexibility, in that you can sell a home that is in the trust's name, and buy a new one in the trust's name without losing this protection. If there are other assets in the trust, like investments, you cannot sell them, but you can continue to receive income from those investments. For this reason, a MAPT is known as an "income-only" trust.

Keep Control without Keeping Assets

Although the use of an irrevocable trust like a MAPT requires you to give up ownership of the assets in the trust, you still retain a measure of control over them. While the trustee of your MAPT controls the assets, you retain the power to change the trustee. If you feel that the assets are not being properly managed or protected, you can discharge the trustee and retain another.

Making a MAPT Work for You

Any trust is effective only if it is properly drafted, executed, and funded. Therefore, it's in your best interest to work with an experienced Ohio elder law attorney who understands the relevant law regarding MAPTs, long-term care planning in general, and estate planning. The experienced elder law attorneys at Gudorf Law Group can advise you as to whether a MAPT is right for you and your family and help you establish one if if is. Please contact Gudorf Law Group online or call 1-937-898-5583 today for a free consultation.

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