Elder Law of Louisville's Blog

Monday, January 31, 2011

What is a Medicaid Asset Protection Trust?


1. Trustee Holds Your Assets 

2. You Get the Income

3. Assets are Protected from Nursing Home Costs

4. Penalty Period Applies Since You Made a Gift

One very useful Medicaid planning technique involves the creation of an irrevocable Medicaid Asset Protection Trust. With this type of trust one person or a married couple (called the settlor, or grantor) transfers some type of property to another person (called the trustee) to hold and manage for the benefit of one or more individuals (called the beneficiaries).
Example: Bill and Betty have savings and investments of $300,000, mostly from the recent sale of their home. They currently live off the income from that sale plus their social security. They worry that if either of them requires nursing home care, their funds will quickly be dissipated.
After consulting with an experienced elder law attorney, Bill and Betty decide to transfer $200,000 of their assets to a Medicaid Asset Protection Trust. The trust provides that all the income from those assets - and only the income - will be paid to the two of them during their lives, and that if either enters a nursing home, the income will be paid to the healthy spouse. After the death of both, the trust will terminate, and whatever is left in the trust will be paid to their children. In this way they can protect their assets and provide a stream of income for the remainder of their lives.
There are some disadvantages to this type of planning. Gifts (including gifts to a Medicaid Asset Protection Trust) can cause the donors to be ineligible for Medicaid benefits for a limited period of time. The length of the ineligibility period depends upon the value of the assets given away. After the ineligibility period has expired, the assets in the Medicaid Asset Protection Trust should be protected from nursing home costs. The other drawback to this kind of trust is that neither spouse can have access to the principal (or assets) of the trust. It is precisely this lack of access that protects the trust assets from nursing home costs. The Trustee can, however, be permitted under some circumstances to distribute trusts assets to the couple's children.
The Medicaid Asset Protection Trust is not for everyone, but in the right circumstances it can be an outstanding means of protecting a family's financial security. The legal rules that apply to these trusts are complicated. If you decide to use this method of protecting your assets, it is important that you use an attorney who is familiar with the intricacies of the Medicaid laws and who has experience in creating this type of trust.
Please note: The Irrevocable Medicaid Asset Protection Trust referred to above is very different from the revocable "living trust" that is currently being sold through "Living Trust Seminars." A revocable "living trust" provides no protection from nursing home costs.

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