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Trust Law/Level IV · Trusts that care/4.2 Old age and long-term care/Lesson 2

Medicaid asset-protection trusts

How an irrevocable trust used in US Medicaid planning works, why the 60-month look-back matters, and what the settlor gives up.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Check exempt transfers before building any trust: assets may pass with no look-back penalty to a spouse, a blind or disabled child, a trust solely for that child, or a trust solely for a disabled person under 65 (42 U.S.C. §1396p(c)(2)(B)).
  2. A Medicaid asset-protection trust must bar any return of principal to the settlor (§1396p(d)(3)(B)); funding counts as a transfer, so it protects only after 60 months. The settlor permanently gives up access to that principal.
  3. Drafting it as a grantor trust (IRC §§671-679) keeps income on the settlor’s own return, and estate inclusion can preserve the IRC §1014 basis step-up; with a $15,000,000 basic exclusion in 2026, inclusion rarely costs estate tax.
  4. A revocable living trust gives no Medicaid protection, since its whole corpus counts as the settlor’s resource (§1396p(d)(3)(A)). Given the stakes, paying an elder-law attorney for an irrevocable design usually costs less than a drafting error.

MaterialsA list of what you or your parent own and how each item is titled (in one name, joint, or in a trust), with approximate valuesYour state Medicaid agency’s information on trusts and transfers of assetsAny existing trust, deed or power of attorney documents, if you have them

Wonder

  1. What happens if nursing-home care is needed within five years of funding the trust?
  2. Can I still live in my house after it goes into this kind of trust?
  3. Who pays income tax on what the trust earns?

Explore

  1. In the United States, a Medicaid asset-protection trust (MAPT) is a planning term, not a type of trust named in federal law. Generally it is an irrevocable trust: the settlor transfers assets, often the home, to a trustee (commonly an adult child), and the trust says the principal can never be paid back to the settlor. At most, the settlor keeps a right to the income, and some designs give the settlor no income at all. The aim is that, after enough time has passed, the principal no longer counts when Medicaid tests the settlor’s resources for long-term care.
  2. The federal trust rules explain why the design is so strict. Under 42 U.S.C. §1396p(d)(3)(B), if there are any circumstances in which the trustee could pay principal or income to the settlor, that portion counts as the settlor’s resource. Only a portion that could never be paid to the settlor escapes, and that portion is treated as a transfer of assets made when the trust was set up (or when payment to the settlor was ruled out). Payments the trust does make to the settlor, such as income, are counted as the settlor’s income.
  3. Because funding the trust counts as a transfer for less than fair market value, the look-back applies. Since the Deficit Reduction Act of 2005, for transfers on or after 8 February 2006, the state looks back 60 months; for nursing-home care, it counts back from the first date the person is both in an institution and has applied for Medicaid. A transfer inside that window can lead to a penalty period during which Medicaid does not pay for long-term care; a transfer made earlier is not counted. Lesson 4.2.3 explains how the penalty is worked out.
  4. The trade-offs are real. The settlor gives up access to the principal: if money is needed later for care, a home repair or anything else, the trustee generally cannot hand principal back without undermining the plan. The trustee, often a child, controls the assets, so the family relies on that person’s judgement and honesty, and on a successor if the trustee dies or cannot serve. Timing is also uncertain, because nobody knows when care will be needed. Whether a home in the trust can later be sold, and what happens to the money, depends on the trust terms.
  5. Tax treatment depends on the design, and this lesson keeps it general. Many such trusts are drafted so that the settlor is treated as the owner for income-tax purposes under the grantor trust rules (Internal Revenue Code §§671-679), which means the settlor reports the trust’s income on their own return. Some designs also aim to keep the assets in the settlor’s estate for estate-tax purposes, so that heirs may receive a ‘stepped-up’ cost basis at death under IRC §1014, which can reduce capital gains tax on a later sale. Whether a particular trust does this depends on its exact terms.
  6. Rules vary by state. Each state runs its own Medicaid program within the federal rules, and states differ in how they read trust terms, what counts as an ‘estate’ for recovery after death, and how they treat a home held in trust. Medicaid applications generally ask about transfers made during the look-back period, including transfers into a trust. A MAPT does not suit every family, and an elder-law attorney is typically involved in drafting one, often alongside a benefits counsellor. This lesson describes the rules; it does not suggest whether such a trust fits you.

Key facts

  • A Medicaid asset-protection trust is a planning term, not a type named in federal law; it is generally an irrevocable trust whose principal can never be paid to the settlor.
  • Under 42 U.S.C. §1396p(d)(3)(B), any part of an irrevocable trust that could in any circumstances be paid to the settlor counts as the settlor’s resource.
  • A part that can never be paid to the settlor is treated as a transfer of assets when the trust is set up, so the 60-month look-back applies.
  • The 60-month look-back applies to transfers made on or after 8 February 2006, under the Deficit Reduction Act of 2005.
  • Under §1396p(d)(3)(A), the whole of a revocable trust counts as the settlor’s resource for Medicaid.
  • Many such trusts are grantor trusts for income tax (IRC §§671-679), so the settlor reports the trust’s income.

Exercise nine, six, three, one

9CollectList up to 9 things you or your parent own (some families have fewer), such as a home, bank accounts, retirement accounts, a car or life insurance, noting how each is titled.
6ClusterSort them into 6 categories: the home, cash and bank accounts, retirement accounts, other investments, personal property, and items whose title you are unsure about.
3DistillReduce the 6 categories to 3 groups: items that may be needed for living costs in the next five years, items the owner wants to keep control of, and items to ask an elder-law attorney or benefits counsellor about.
1CrystallizeWrite 1 sentence describing what giving up access to the principal would mean in practice for the person whose assets these are.

Fact check

Dates, figures and claims checked against the published sources listed below.

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