How do I protect my property (or my parent's house) from the nursing home?

Medicaid Asset Protection Trust

The most common way to protect your home in the event that you (or your parent) have to go to a nursing home or long-term care facility is to set up an irrevocable living trust - commonly known as a Medicaid Asset Protection Trust (MAPT). Some attorneys may also refer to this type of irrevocable trust as an irrevocable income-only trust, or, in Massachusetts, it’s commonly referred to as a MassHealth trust since MassHealth is the term Massachusetts uses for its Medicaid program. 

Side note: do not confuse Medicare with Medicaid. Medicaid is a needs-based program (i.e., countable assets below 2k and low income), whereas Medicare is an insurance that you generally get when you reach age 65 and generally does not cover long-term care.

However, in order for a Medicaid Asset Protection Trust to work, you need to make sure you create and fund the trust at least 5 years prior to entering a nursing home to get around the 5-year look-back period. If you fail to get beyond the 5-year lookback period, then you will be penalized based on a “Medicaid Penalty Divisor,” which varies by state (generally around $350 - $450 per day at the time of this writing). 

So, for example, if you made a gift of $500,000 (or a home equal to that value) within the 5-year look back, then you would take that number (500k) and divide it by your state’s divisor (let’s just say $400), which would equal 1,250 days or roughly 3.42 years. In practice, if a client transfers their home to a trust and goes to a nursing home prior to reaching 5 years from the date of transfer, then the penalty divisor may make the penalty period so long that your family will just private pay until they hit the 5-year mark on that transfer. 

How does a Medicaid Asset Protection Trust work?

The concept is fairly straightforward - you create an irrevocable trust, name someone other than yourself as the trustee (the manager of the trust), make sure the trust is written in a way that does not violate the “any circumstances test,” and transfer the property to the trust hoping to get beyond the 5-year lookback period.

What is the “Any Circumstances Test”

The any circumstances test is a rule that determines whether the assets held in your Medicaid asset protection trust are countable or non-countable. In theory, the rule is super simple - are there any circumstances in which you, the grantor (i.e., the trust maker, the donor, the settlor) have access to the principal of the trust? In other words, is there any way that you can get the principal out of the trust and back into your own pocket? For example, if the trustee can sell your home held in trust and transfer the sales proceeds back to you, then that is a clear violation of the any circumstances test. If the answer is yes, then you’ve failed the test. 

If your trust is deemed to have violated the any circumstances test, then you can either appeal the decision or break the trust - which is why it’s so important to make sure you don’t inadvertently draft the trust in a way that violates the any circumstances test.

So what are some traps that would violate the any circumstances test?

This varies by state because of the interpretation of the any circumstances test, however, there are some common traps to look out for when considering a Medicaid asset protection trust (or when reviewing an old trust you may have set up years ago):

Since I am only licensed in Massachusetts and New Hampshire, I can only speak to the interpretation of those two states with respect to the any circumstances test in those jurisdictions, but be aware that anything I write in this article can be subject to change since this is such a controversial type of planning. There is no guarantee your trust will work for Medicaid protection purposes, that is a risk you are willing to take when you decide to create and fund one of these trusts.

Let’s go through a few of the more obvious traps to avoid when drafting a Medicaid trust:

1. Do not make it revocable (MUST BE IRREVOCABLE)

2. Do not retain any rights to the principal (you must clearly waive any and all rights to the principal of the property placed in trust)

3. Do not include a right to borrow from the trust or take a loan out from assets held in trust

4. Do not include the right to substitute assets from the trust

5. Do not include the right to purchase an annuity in the trust

6. Do not name yourself as trustee of the trust

7. Do not give yourself a general power of appointment over the trust

8. Do not authorize the trustee to pay any expenses on your behalf

9. Do not include any language that would indicate the trustee or beneficiaries have an obligation to support

10. Do not allow the trustee to allocate or make adjustments on receipts between principal and income 

11. If you are married, make sure that your spouse waives all the same rights as you and is subject to the same restrictions as you (in other words, both you and your spouse should be completely cut off from the principal of the trust)

When you read this list, it may become increasingly clear that when gifting assets to this trust, you are effectively giving away the property - so why wouldn’t you just gift the trust to your kids and keep things simple?

Here’s why you want to do a Medicaid trust and NOT gift the asset to your kids:

1. Get a stepped-up cost basis - if the trust is drafted as a grantor trust, then upon your passing, your children would get something called a stepped-up cost basis upon your death. This means that when they eventually sell the home, they may pay little to no capital gains tax on the sale of the property. Whereas if you just straight out gifted the property to them, they would receive a carryover basiswhich means they will likely have to pay hundreds of thousands of dollars in income taxes, assuming you have a low cost-basis in the property. 

2. Protect the home from creditors (including your children’s creditors) - not only will a properly structured Medicaid asset protection trust protect your home or other assets from your creditors, but it can also protect the assets from the beneficiaries’ potential creditors. For example, imagine you gifted a property to one of your kids with the understanding that you wanted to continue living in the home for the rest of your life, and then all of a sudden, one of your kids on the deed gets divorced, or has a creditor issue, or has a lawsuit filed against him or her? An irrevocable trust can protect you against that type of scenario.

3. Option to Change beneficiaries - you have to be careful with this one because it can vary by state and by the scope of the power - this is also known as a limited power of appointment - the basic idea is that you can alter the beneficiaries through a testamentary power so if, for whatever reason, you decide to remove or alter the distribution of the assets after your death, the Medicaid trust allows you to do that (within certain limits). Similar to everything else I’m talking about in this article, this rule may change over time, so pay careful attention to this testamentary limited power of appointment in your irrevocable trust.

4. Retain Personal Exemption Exclusion - What if you gifted the home to your kids and then decided you wanted to downsize? Where would the proceeds go? Who would be responsible for paying the income taxes on that sale? And what would those income taxes look like? With a properly structured Medicaid asset protection trust, you generally don’t have to worry about those implications because the home may still qualify for the personal exemption ($250,000 for single filers, $500,000 for married couples at the time of this writing). Plus, not only can the trust shield your family from income taxes (whereas an outright gifted deed would not), but it also makes sure the sales proceeds go to the trust and not to your kids directly, which once again makes sure that the proceeds aren’t diverted to misuse or creditors of your children. In other words, you can make sure that the money from the sale of the home is properly used to buy another home, and the remainder can be reinvested with the income being distributed to you. Please note: I said the income could be distributed to you, but not the principal - and that income is still countable if you need Medicaid, but many clients are fine with that so long as the principal is still protected.

5. Option to remove/replace trustees - Even though you are not in control of the trust, you can still determine who will be the trustee of the trust and can generally change that trustee if he/she is no longer reliable or competent. Whereas, if you were to gift the property to a child, once their name is on the deed, then that’s it, and there’s nothing you can do about it without that child’s consent. Once again, check your state rules to see the best practice for drafting this provision into your trust.

6. Right to reside in the home / occupy real estate held in trust - This is a slippery one and probably one of the most heated debates you see among estate planners and Medicaid administrators today. Once again, if you gift the property away, there is no guarantee that you can continue living there, but with a Medicaid asset protection trust, many attorneys will draft some variation of language in the trust to ensure that you still retain some rights over the property while trying to avoid it from being countable for Medicaid purposes. Please note, that some estate planners do not use this provision and will have a use and occupy agreement outside your trust, so you’ll need to rely on the judgment of your local estate planning attorney to see if this provision makes sense to include in your trust. Current case law at the time of this writing indicates that you should not use this provision in a New Hampshire Medicaid asset protection trust, but that such provision may be permissible in Massachusetts so long as you are aware of the risks of your Medicaid application being rejected and/or appealed (and the possibility that they may reverse course on more recent case law). Putting that disclaimer to the side, the basic idea is that you would include the right to continue to reside in the home so long as you continue to pay all expenses related to the property. Some drafters will make this an exclusive occupancy (similar to, but not the same as, a life estate), whereas others will draft it simply as an ability to occupy the property but remove other rights to further distance the power from being called a life estate (because it isn’t one) to avoid implications of countability. There is also the question of imputed income - in other words, if you live in the home rent-free, should the value of that benefit be applied to you somehow for Medicaid purposes? Once again, speak with your local estate planning attorney to evaluate whether it makes sense to include such a provision in your Medicaid asset protection trust.

There are also certain exemptions that may be applicable in your state for Medicaid purposes, so you will need to speak with an experienced estate planning attorney to determine which option makes the most sense for you and your family.

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Joseph M. Lento, J.D.

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