What is a Medicaid Asset Protection Trust?

What is a Medicaid Asset Protection Trust?

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Instead of lavishing their assets to qualify for a Medicaid, most individuals usually create plans to secure the asset in a way that still makes them eligible for Medicaid. One of the most common way of securing ones assets before applying for Medicaid is by setting up a trust commonly known as Medicaid trust. Medicaid Asset Protection Trust, synonymous to irrevocable “income only”, Trust or simply Medicaid Trust, are designed to protect assets and still allow individual qualify for Medicaid care benefit. To protect the assets, the trust must be set up 2 ½ years prior to when home care Medicaid is required or 5 years before nursing home care is required.

How does this Trust work?

Generally, there are two types of trusts—revocable trust, and irrevocable trust. A Medicaid asset protection trust is an irrevocable trust—a trust where its terms cannot be altered, modified, or eliminated without the terms of the beneficiaries of the trust. Since this trust is irrevocable, Medicaid wouldn’t consider the assets present on the trust as that of the applicant who created the trust. That is the main reason why assets in this trust are well protected.

The grantor of a Medicaid trust must designate an individual aside from his or her spouse as trustee. Although, this denotes that the grantor will lose ownership of the trust, he or she has the authority to discard and replace any trustee and keep a limited power of appointment which allows him or her to change the beneficiaries of the trust. If the grantor is a homeowner, the individual can retain the right to live in the home rent-free for their whole life—with the spouse having similar right.

This setting, which is regarded as “life estate” allows the grantor to continue to get receive any property tax exemptions, such as STAR. Assets placed in the trust also enjoys a complete step up in the event of the grantor’s death—preventing capital gains tax.

The grantor is not entitled to corpus, or principal, of the assets present in the irrevocable trust. While it is impossible for the grantor to use the principal of the trust, the individual can still get all income (interest, dividends, rental income, etc.) that the trust assets may incur. Since the grantor must designate someone other than his or her spouse as trustee of the trust, it is the trustee’s duty, and not that of the grantor, to invest assets placed in the trust. Since the grantor has a little control over assets placed in the Medicaid trust, it is regarded as a grantor trust and the grantor is taxed on any income, regardless of the fact that a different tax id number is used for the trust.

When an irrevocable trust is set up, assets the grantor wish to secure are the renamed in the name of the trust. This is commonly regarded as “funding the trust.” Assets can range from a checking or brokerage account to the title of an individual’s residence. Individual retirement accounts cannot be retitled into the name of the trust as they are already secured for Medicaid purpose by law—provided the laid down minimum distribution is taken.

When Are the Assets Placed in a Medicaid trust Protected?

Since the transfer of assets to the trust is regarded as a “gift”, a specific timeframe must pass before the assets are protected. The reason for this is because Medicaid places a “look-back” period when an individual applies for this government-backed health care program. Medicaid places stringent income and asset rules, and once applicants meets the requirements, Medicaid would surely want to know what happened to their asset. The look-back for community Medicaid is 2 ½ years and 5 years for severe Medicaid.

It is very important that applicants reveal the existence of the Medicaid Asset protection Trust—the government will still find out any way.

Do you want more information regarding a Medicaid? Or do you wish to protect your assets by setting up a Medicaid trust? Contact our office to speak with our Medicaid attorney.

DISCLAIMER: The information provided in this blog is for informational purposes only and should not be considered legal advice. The content of this blog may not reflect the most current legal developments. No attorney-client relationship is formed by reading this blog or contacting Morgan Legal Group.

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