Long-term care insurance is the preferred option for protecting assets from nursing home costs, because it helps keep clients out of the nursing home by paying for home care. The trend today is to “age in place.” Many clients over the years were forced to spend their final days in a facility simply because they ran out of money to pay for home health aides. Additionally, for married couples, the home care option may protect the spouse from compromising their own health and finances with the heavy burden of care giving in their later years. Too often, it is the caregiver spouse who dies first; we sometimes refer to the situation as a “perfect storm.”  The spouse caregiver is often in the eighties or nineties. The job is 24/7/365, and it is a very hard one.

When the client is turned down for long-term care insurance, or is unable to afford the premium, the next best option is the Medicaid Asset Protection Trust (MAPT). Making assets joint with adult children offers no protection because Medicaid considers all of the jointly held assets to be available for the care of the ill parent, except to the extent the child can prove the amount of their actual contribution. Additionally, outright transfers to children are generally inadvisable because those assets then become exposed to the child’s debts and liabilities, divorces, etc. In addition, some children spend the money, refuse to give it back when needed, or die before the parent and pass those assets on to their heirs. One exception to the inadvisability of outright transfers to children is when long-term care is imminent or at least foreseeable. In such a case, the assistance of an elder law attorney is essential since the amounts to be transferred, the order of assets transferred and where to transfer the assets all require the advice of counsel. The object here would be to protect as much of the assets as possible and to qualify for Medicaid benefits at the earliest possible moment. If someone is just getting older, can’t or won’t get long-term care insurance and wants to plan ahead to protect their assets, the best option is to create a Medicaid Asset Protection Trust (MAPT).

Known as an irrevocable “income only” trust, the MAPT names someone other than you or your spouse as the trustee, usually one or more adult children, and limits you to the income. The principal must be unavailable in order for it to be protected. These trusts are ideal for the family home, as well as for assets the client is only taking the income from or is simply reinvesting.  The client’s lifestyle is not generally affected since he or she continues to receive the pension and Social Security checks directly, they keep the exclusive right to use and occupy the home and they preserve all the property tax exemptions on the home. The trust may sell and trade assets through the trustee. Nevertheless, the parent retains some measure of control by reserving the right to change the trustee in the event of dissatisfaction for any reason.                                 

Transfers to the MAPT are subject to a look-back period of up to five years for facility care and potentially a new two and a half year look-back period for home care services. This means, for example, that if assets are transferred to the MAPT, and the client needs nursing home care any time after five years have passed, the assets in the trust are protected. Nevertheless, it always pays to get started, because you get credit for the time you accumulate, even if you don’t make the five years. For example, if the client needs nursing home care after only, say, four years, then they would only have to pay for the one year that’s left on the look-back.

The Medicaid Asset Protection Trust is also flexible. You may sell the home, the money is paid to the trust, and the trust may buy a condominium, for example. The condo is still protected because it is owned by the trust, and the five-year look back does not start over since nothing was transferred to the trust. The trust simply sold one asset and purchased another, as it is permitted to do.  

The trust may buy, sell, and trade stocks and other assets. IRAs and other qualified plans stay out of the trust because the principal of all such retirement plans is exempt from Medicaid.  These types of assets also avoid probate as they go directly to the designated beneficiaries at death.

The MAPT is called “irrevocable” because you, the grantor, may not revoke it yourself.  However, in New York we may still revoke the MAPT provided all the named parties agree in writing. Because this is most often just you and your immediate family, it is generally not difficult to revoke an “irrevocable” trust.

MAPT vs. Life Estate Deed

Clients often ask whether the home should be deeded to the client’s adult children, while retaining a life estate in the parent or whether the Medicaid Asset Protection Trust should be used to protect the asset.

Although the deed with a life estate will be less costly to the client, in most cases it offers significant disadvantages when compared to the trust. First, if the home is sold prior to the death of the Medicaid recipient, the life estate value of the home will be required to be paid towards his or her care. If the house is rented, the net rents are payable towards their care because they belong to the life tenant. Finally, the client loses a significant portion of his or her capital gains tax exclusion for the sale of their primary residence as they will only be entitled to a pro rata share based on the value of the life estate to the home as a whole. All of the foregoing may lead to a situation where the family finds they must maintain a vacant home for many years. Conversely, a properly drafted MAPT preserves the full capital gains tax exclusion on the primary residence and the home may be sold by the trust without obligation to make payment of any of the principal towards the client’s care, assuming we have passed the look-back period.

It should be noted here that both the life estate and the irrevocable Medicaid trust will preserve the stepped-up basis in the property, provided it is only sold after the death of the parent who was the owner or grantor. Upon the death of the parent, the basis for calculating the capital gains tax is stepped up from what the parent paid, plus any improvements, to what it was worth on the parent’s date of death. This effectively eliminates payment of capital gains taxes on the sale of appreciated property, such as the home, after the parent dies.

Grantor Trust Status

Due to its status as a “grantor trust,” the grantor pays the tax on MAPT income, regardless whether it is actually distributed to the grantor.

Grantor trust status is found in IRC sections 679 and following.  A limited power of appointment in the MAPT allowing the grantor to change the beneficiaries during the grantor’s lifetime is advisable not only for grantor trust status but also to allow for flexibility should circumstances (such as estrangement of a child) change in the future.

Grantor trust status also preserves the IRC Section 121 exclusion of $250,000 on the sale of the primary residence during a grantor’s lifetime, or $500,000 for a couple. It is useful to know that the $500,000 exclusion is extended for a two year period following the death of a spouse.

Michael Ettinger, Esq., was born in Montreal, Canada. He graduated from McGill Law School with honors in 1977 and obtained his Masters of Laws degree from The London School of Economics in 1978. Mr. Ettinger joined the New York Bar in 1980. He was a founding member of The American Academy of Estate Planning Attorneys and past president of The American Association of Trust, Estate and Elder Law Attorneys. He is a contributor to the New York Bar Journal and has published over 100 articles on elder law estate planning. In 1991, Mr. Ettinger founded Ettinger Law Firm. Today, the firm maintains offices in 13 New York locations: Albany, Fishkill, Huntington, Islandia, Lake Success, Melville, Middletown, New City, Rhinebeck, Rockville Centre, Saratoga Springs, Staten Island, and White Plains.