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Understanding the Medicaid Family Protection Trust

The Medicaid Family Protection Trust is an option that should be considered for elder law clients that are interested in protecting not only their own assets, but those of their children or other beneficiaries from falling into unintended hands. It is an irrevocable trust that can shield clients’ assets from creditors or anyone that may attempt to obtain assets in the event of an unpleasant family situation, for example. Then, the assets are passed in further trusts after the grantor’s death, to keep the assets in a protected status. Some scenarios where this would be beneficial include a child’s divorce where an ex-spouse is attempting to get to family assets, or in the event that a biological child or legal dependent may be in a bad debt or even an addiction situation, which would put the parental assets at risk.

Essentially, the Medicaid Family Protection Trust includes some of the same benefits of a Medicaid Asset Protection Trust but provides added asset protection. This trust is also appropriate for Medicaid planning.

ElderCounsel member lawyers have shared that, while their clients aren’t always ready to talk about Medicaid or the future need for long-term care, they are willing to talk about asset protection for their family and the ability to protect assets from any creditors that could threaten their legacy. The Medicaid Family Protection Trust also provides protection of assets should the need for Medicaid arise.

This type of trust ultimately puts the focus on a positive goal: protecting assets for loved ones. To that end, this trust is a win-win for elder law attorneys and their clients.

Ideal for young retirees

Mature couple signing financial contractThe Medicaid Family Protection Trust is a good option for younger retirees who want to protect themselves from all sorts of unexpected life scenarios. Furthermore, it is set up to include trusts for lifetime beneficiaries so that the asset protection features continue beyond the grantor’s death.

“If I were to think about the ideal client for a Medicaid Family Protection Trust, it’s someone who’s maybe a little more sophisticated, someone who doesn’t mind the idea of ongoing trusts for a long time, even after death, or you’ve got beneficiaries and children who are also a little bit more sophisticated and really get the idea and the planning concepts,” says Brian Albee, Director of Law and Technology, ElderCounsel.

This type of trust requires the appointment of a distribution trustee, which Albee says can scare some clients off. But he assures elder law attorneys that this isn’t as complicated as it sounds. That’s because the trustee can be anyone who isn’t a family member — it need not be a bank or independent institution — and the person can be chosen by the client.

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Be aware of Medicaid’s 5-year lookback

understand-medicaids-5-year-look-back-periodWhile the odds of needing nursing-home care are lower for younger clients, it’s still important to be aware of the potential implications of Medicaid’s five-year lookback period as it applies to this type of trust. Essentially, Medicaid can look back over a period of up to five years when running the financial analysis to determine whether or not a person qualifies for benefits.  

That means that your client will need to create the trust, transfer the assets to it (fund the trust), and not have a need for Medicaid for at least five years. After the five-year mark, the client will be fully protected and will qualify for Medicaid without having to use the trust assets to pay for their care.

If your client must apply for Medicaid before the five years is up in order to cover nursing-home expenses, then the client can either opt to be a private pay patient for the remainder of the five-year lookback period or Medicaid will assess a penalty period, where the client will not receive benefits for a certain amount of time. The length of the penalty period depends on the amount of assets transferred and the amount of time that has passed since the transfer.

How the trust works while the Grantor is living

Lifetime beneficiaries of the Medicaid Family Protection Trust are either the grantor's children or named individuals. The grantor him or herself is not a beneficiary.

Trustee responsibilities are split between the Regular Trustee, who manages all of the assets, and the Distribution Trustee, who is the only one authorized to make distributions from the trust. At the Distribution Trustee’s discretion, distributions can be made to any one or more of the lifetime beneficiaries in equal, or unequal, amounts regardless of needs.

This creates a third-party trust, protecting the assets for the benefit of the lifetime beneficiaries during the grantor's lifetime.

How the trust works after the Grantor's death

After the grantor's death, the trust splits into shares for named individuals or for the grantor's descendants.

If the trust divides into shares for the grantor's descendants, the division of the distribution is determined by the descendant distribution option selected when the trust was established. If all children are still living, the trust is divided into equal shares, regardless of the descendant distribution option.

Each child's share is held in trust, and each child has the authority to appoint his or her own Distribution Trustee (this also must be an independent party). The child has no right to force a distribution but can remove the Distribution Trustee and appoint a new one if he or she so desires. If a trust specifies that the child will be his or her own regular Trustee, then a beneficiary controlled trust that is asset protected has been created. In this case, the child will be able to manage the assets, but only the independent Distribution Trustee will be able to make distributions.

Upon the child's death, the child's share is divided among his or her descendants and held in trust under the same terms. To that end, asset-protected trusts are created for each child's family. If the trust divides into shares for named individuals, each share will be held in trust.

While no two cases for the use of the Medicaid Family Protection Trust are the same, this type of trust has safeguards for protecting assets that can be beneficial in a number of scenarios where a client is concerned about protecting his or her legacy from unforeseen circumstances in the future. If you’d like more information or resources on asset protection trusts, contact ElderCounsel. You can also preview the EC Medicaid Family Protection Trust in ElderDocx here.

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