How Does a Medicaid Asset Protection Trust Work?

Nursing-home care in the New York metropolitan region costs between $15,000 and $20,000 per month as of 2024-2025. Most families cannot sustain that expense privately for the years that long-term care typically requires. Medicaid is the only realistic third-party payer for non-affluent and middle-class New Yorkers facing skilled nursing placement, and Medicaid eligibility requires both income within program limits and countable resources under approximately $32,396 for a single applicant.

Without planning, a family confronting a nursing-home admission spends down nearly the entire estate to qualify — typically over the course of one to three years, during which the family home is often sold to pay private nursing-home bills. The MAPT prevents that outcome by transferring family assets out of countable resources at least five years before the application, so the assets are sheltered when care becomes necessary.

The five-year requirement comes from the look-back period under 42 USC § 1396p(c)(1)(B) and SSL § 366(5). Any transfer for less than fair market value within the 60 months preceding the Medicaid application is added back to the applicant's resources, and the applicant is denied benefits for a calculated period equal to the transfer amount divided by the regional monthly divisor. Transfers more than 60 months before the application are not penalized.

The drafting precision required by EPTL Article 7 and the Medicaid regulations is specific. The grantor must permanently surrender the power to revoke the trust, the power to amend its terms in ways that benefit the grantor, and the power to access trust principal directly. The grantor can retain the right to income generated by the trust assets — interest, dividends, rental income — without causing the trust to be a countable resource.

The grantor can also retain a limited power of appointment (LPOA) under EPTL § 10-3.1 — the right to direct, by will or during life, how the trust assets pass among a defined class of beneficiaries (typically descendants). The LPOA preserves family flexibility, does not cause the trust to be revocable, and is widely accepted by Medicaid as not undermining the trust's irrevocability. We include an LPOA in nearly every MAPT we draft.

The trustee must be someone other than the grantor. We typically name an adult child as primary trustee, with a successor trustee structure that ensures continuity. The trustee owes fiduciary duties under EPTL § 11-2.3 (the Prudent Investor Act) and must follow the trust's distribution restrictions, which are typically narrow during the grantor's life — distributions are usually limited to the grantor's income and (in some structures) limited distributions to other family members for specific purposes.

The family home is the most common funding asset. Title is transferred from the grantor to the trustee of the MAPT by deed (typically a quitclaim deed prepared and recorded by us). The grantor reserves the right to live in the home for life — a right of occupancy that is sometimes structured as a formal life estate under EPTL § 6-5.1 and sometimes as a contractual right of occupancy in the trust instrument. Either structure preserves the grantor's residence without making the home a countable resource after the five-year wait.

Securities and brokerage assets are the second common funding category. The grantor transfers brokerage accounts to a new account titled in the trustee's name as trustee of the MAPT. The trust invests the assets, the grantor receives the income, and the principal is sheltered. Tax structure matters: we draft the MAPT as a grantor trust under IRC §§ 671-679 so that income flows to the grantor's individual return at the grantor's individual rate (typically lower than the trust's compressed bracket), and so that the assets receive a step-up in basis at the grantor's death.

Retirement accounts are usually not transferred into MAPTs. The transfer would be treated as a full distribution for income-tax purposes, producing an immediate tax bill that frequently exceeds the Medicaid benefit. We plan around qualified retirement accounts using other mechanisms — spousal allowances, conversion to permitted income streams, or simply spending the retirement assets first and sheltering everything else.

Once funded, the MAPT operates for years before it has any Medicaid significance. The grantor continues to live in the home, receives the income from the trust assets, and files individual tax returns reporting that income (the grantor-trust structure makes the trust transparent for income-tax purposes). The trustee manages the assets and files an informational return — IRS Form 1041 marked as a grantor trust — but pays no separate trust-level tax.

The grantor's other estate-planning documents — will, healthcare proxy, power of attorney — must be coordinated with the MAPT. The will typically directs that any assets remaining outside the MAPT pass according to the family's overall plan, while the MAPT's terms control its own corpus. The power of attorney should authorize the grantor's agent to make additional gifts to the MAPT trustee if circumstances warrant — without express gifting authority, the agent cannot move additional assets into the trust later.

Five years and one day after the transfer, the assets in the MAPT are sheltered from Medicaid. The grantor can apply for nursing-home Medicaid, the trust is disclosed on the application, and the Department of Social Services confirms that the transfer is outside the look-back window. Eligibility is approved, the trust continues to operate, and Medicaid covers the nursing-home costs.

On the grantor's death, the MAPT assets receive a step-up in basis under IRC § 1014 because the grantor retained sufficient control through the limited power of appointment to cause estate-tax inclusion under IRC § 2038. Estate-tax inclusion is irrelevant for most clients (the federal exemption is $15,000,000 per person for 2026, well above middle-class estates), but the income-tax step-up is enormously valuable — heirs who sell the home or appreciated securities after the grantor's death pay capital-gains tax only on appreciation after the date of death.

The trustee distributes the MAPT corpus according to the trust's terms, typically to the grantor's descendants per stirpes. If the grantor exercised the limited power of appointment by will to direct a different distribution, the will's directive controls. Either way, the assets pass outside probate — the MAPT functions as a complete probate-avoidance instrument in addition to its Medicaid-shelter role.

Medicaid's estate-recovery rules under SSL § 369 generally do not reach MAPT assets, because the assets passed out of the grantor's ownership more than 60 months before death. Estate recovery applies only to assets that were part of the decedent's probate estate; properly structured MAPT assets bypass probate and bypass the lien.