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When Should You Recommend the Medicaid Asset Protection Trust to Your Clients?

We've given you a quick comparison of four types of asset protection trusts used in elder law, but we wanted to take it one step further and break down each type into more detail. The first trust we will cover is the most popular trust created in ElderDocx, the Medicaid Asset Protection Trust.

For elder law attorneys, the Medicaid Asset Protection Trust can be a complex asset protection trust to understand. While it has many benefits, there can also be some drawbacks, so it’s important to know when and why you might want to recommend this type of trust to your elder law clients.

While the Medicaid Asset Protection Trust is not for everyone, it can be an effective trust for protecting a family’s financial security in certain circumstances.

risk-vs-reward

Benefits and Drawbacks

The biggest benefit of the Medicaid Asset Protection Trust is that it allows one to qualify for Medicaid while protecting their assets, thus offering an alternative to expensive long-term care insurance.  Long-term care insurance is extremely costly and very hard to qualify for in some cases.  Oftentimes clients will wait to apply for this type of insurance at a time when they are too old or not in good health and thus are not insurable.

The funding of this type of trust has many tax benefits in comparison to simply gifting assets to loved ones to spend down the assets in order to qualify for Medicaid.  If your client needs to remove assets from their countable estate for Medicaid purposes and chooses to simply gift those assets to loved ones, there will be negative tax consequences.  Your client may owe gift tax on the transfer.  But more importantly, the asset will lose its step-up in basis for income tax purposes.  This could result in huge capital gains taxes when the asset is sold.  However, if your client puts the asset in the Medicaid Asset Protection Trust, no gift tax will be due at the time of the transfer and the asset will receive the step-up in basis at the time of the grantor’s death.

One drawback of this type of trust is that your client will lose a significant amount of control over the assets placed in the trust.  The loss of this control is precisely what enables the asset to be shielded from Medicaid recovery.  The grantor can be the income beneficiary of the trust, but the grantor will relinquish the right to remove any of the trust property and place directly back into their name. The property must remain in the trust. 

gives-them-a-choice-later

A Medicaid Asset Protection Trust is well suited for clients where there is no immediate healthcare crisis, and thus Medicaid is not currently needed.  The Medicaid Asset Protection Trust will allow a person to protect some or all of their assets in this scenario by putting those assets into this type of irrevocable trust while they are healthy and of sound mind. This is appealing to clients that wish to have options when it comes to controlling what portion of their assets they can use to pay for their care and whether or not the people they’ve allowed to have access to the trust will step in and help should that need arise. The caveat here is that you need to be sure to advise your client about future scenarios and the possibility of running out of money should they encounter a serious health problem that would exhaust their own funds or be outside of the scope of their alternative insurance coverage.  Should the need for Medicaid be imminent, this trust may be able to protect some, but not all, of their assets.

“One of the things that I like about this trust is that it doesn’t force anybody into Medicaid, but it gives them a choice later,” says ElderCounsel CEO, Valerie Peterson. “It gives people choices, it protects assets, and if somebody does need to qualify for Medicaid in the future, it won’t — the assets in the trust won’t count against them.”

>>Your First Elder Law Client Consultation: What You Need to Know<<

understand-medicaids-5-year-look-back-periodMedicaid’s 5-year lookback period

As mentioned earlier, this trust can impact your client’s Medicaid eligibility. Therefore, it’s 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 coverage.  

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 of the funding of the trust, the client will be fully protected and will qualify for Medicaid.

If your client must apply for Medicaid before the five years is up, they can choose to be a private pay patient for the remainder of the years necessary to reach the five-year mark or they can choose to have Medicaid 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.

meeting with elder law clientsWhen to use it

The Medicaid Asset Protection Trust is an option for clients that are close to retirement age and for those who have passed retirement age. Peterson recommends framing the client conversation about Medicaid Asset Protection Trusts by talking about possible future scenarios and providing statistics on long-term care costs.  

 

The Medicaid Asset Protection Trust is just one of many documents offered in ElderDocx. If you’d like to know more about when Medicaid Asset Protection Trusts should be recommended to clients, contact us today. You can also download a free document preview of the Medicaid Asset Protection Trust.

EC Medicaid Asset Protection Trust Document Preview

If you found this article helpful, you'll also want to read "Understanding the Medicaid Family Protection Trust."

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