TABLE OF CONTENTS
- Remove disqualifying assets from the potential Medicaid applicant’s financial estate to make them eligible for Medicaid’s long-term in-patient healthcare coverage.
- Pre-planning to prevent transfers within the “Medicaid 5-year Look-back Period” which would trigger a “Medicaid Penalty Period”.
- Transferring the potential Medicaid applicant’s assets in a way that preserves their value as well as any benefits related to the assets.
Top 3 Benefits of Irrevocable Medicaid Asset Protection Trusts you NEED to Know in 2019!
Though an irrevocable Minnesota Medicaid Asset Protection Trust (also known as a 'Medicaid Trust', or MAPT) has many benefits, the Top 3 Benefits sought by Minnesotans include:
Top Benefit #1:
Remove disqualifying assets from the potential Medicaid applicant’s financial estate to make them eligible for Medicaid’s long-term in-patient healthcare coverage.
Medicaid eligibility is determined by means-testing. This means that if the applicant has assets OR income above Medicaid’s eligibility limits, Medicaid will determine the applicant “has the means” to pay for long-term in-patient healthcare themselves – that the applicant doesn’t need Medicaid’s assistance.
If Medicaid makes such a determination, the applicant will have to use-up (“spend-down”) whatever cash they have and liquidate their assets to pay for their own long-term in-patient healthcare until they have spent everything down to a point where they DO need Medicaid’s assistance – currently, the Minnesota Medicaid asset limit is $3,000 per person. (NOTE: in 2016 the average cost for a semi-private room in a Minnesota nursing home was $7,361 per month).
To avoid this “spend-down” scenario, assets the potential Medicaid applicant doesn’t need for daily living but also doesn’t yet want to transfer to their beneficiaries, can instead be transferred into an irrevocable Medicaid Asset Protection Trust (MAPT) – putting them out of reach of Medicaid’s means-testing.
AN IMPORTANT CAVEAT: 5-years must pass after transferring assets into the MAPT before the assets are fully protected (to escape the Medicaid 5-year look-back). After 5-years passes, the assets in the MAPT are no longer is the Grantor’s financial estate (the “Grantor” is the person who sets up the MAPT – i.e. the potential Minnesota Medicaid applicant).
So you can easily see that without proper planning for one’s potential need for long-term in-patient healthcare, a person’s lifetime of work can quickly disappear simply paying for a few years of long-term in-patient healthcare. Meaning their life’s work will go to a healthcare facility and not to their heirs.
But with proper planning, the potential applicant’s assets and/or income can be removed from the means-testing calculations. This means that the applicant can qualify for Medicaid AND still give their life’s work to their heirs - all while being able to use and enjoy those assets as long as they are able.
Top Benefit #2:
Pre-planning to prevent transfers within the “Medicaid 5-year Look-back Period” which would trigger a “Medicaid Penalty Period”.
If you have already read my article Minnesota Medicaid Asset Protection Trust - An Overview, then you know that unnecessary improper transfers during the Medicaid 5-year look-back can cause a costly Medicaid Penalty Period (and if you haven’t read it, I recommend you do as soon as you finish this article!). Therefore, pre-planning to avoid such a penalty period is vital – and a MAPT is often the best method.
Something else to consider is not only will improper transfers during the Medicaid 5-year look-back period make a Medicaid applicant ineligible for Medicaid benefits for the duration of the Medicaid Penalty Period, such transfers can also put the recipients of those improper transfers in hot water.
For example, a long-term healthcare facility looking for payment could potentially seek placing a lien on improperly transferred real estate or they could potentially file a civil court claim against the recipients of other improperly transferred assets! Don’t let this happen to you or your heirs!
REMEMBER: for a MAPT to provide full asset protection, assets must be transferred into the Trust at least 5-years BEFORE the need for long-term in-patient healthcare arises.
Top Benefit #3:
Transferring the potential Medicaid applicant’s assets in a way that preserves their value as well as any benefits related to the assets.
EXAMPLE - a problem with transferring the deed to an unmarried/widowed person-in-need’s home:
If the person-in-need owns a personal residence, is no longer married (or their spouse passed away before them), and requires long-term in-patient healthcare, their home will NOT be exempt from Medicaid’s means-test calculations.
Therefore, if the person-in-need still owns the home at the time they apply for Minnesota Medicaid benefits, the fair market value of that home will more than likely lead to their Medicaid application being denied for being above the eligibility asset limit (currently $3,000 for a single applicant).
The person-in-need will then likely have to sell their home and use the proceeds to pay for their long-term in-patient healthcare until their assets fall below the $3,000 asset limit threshold.
In an effort to avoid the scenario of having to sell their home to pay for their future long-term in-patient care, some may think, “I can just transfer my home to my child now – because they are just going to get it anyway. My great idea will save so much money because I won’t have to pay some lawyer to set up a Medicaid Asset Protection Trust!”
To that person, I say: Well, OK, doing so can potentially save YOU some money now; however, you are setting up your child for a large tax obligation that will cost them MORE money in the end. Therefore, saving yourself a quarter now can cost your child a dollar later. So it is NOT such a great idea – unless you think it is a great idea to reduce your child’s inheritance because you want to give that money to the government in the form of taxes.
How is that possible? Well, let’s say the potential Medicaid applicant originally purchased their home years ago for $50,000, but it is now worth $150,000.
If they then decide to just gift the home to their child now, without putting it into a MAPT (and the potential Medicaid applicant later does need Medicaid benefits), the home will keep the “tax basis” of the original purchaser (the potential Medicaid applicant) even after transferring the deed.
So in this example, the tax-basis of $50,000 (the potential Medicaid applicant’s original purchase price) will pass from the potential Medicaid applicant to their child to whom the home was transferred.
This means that when/if the child later sells the home for the fair market value of $150,000 (maybe because the child already has their own home), the child will have to pay gains taxes on the $100,000 profit ($150,000 – $50,000 = $100,000 profit).
This tax payment is likely going to be much higher than the cost of setting up and transferring the home into a MAPT would have been!
IN CONTRAST, this time, let’s say the home was instead transferred into a MAPT naming that same child as the beneficiary of the home.
In this scenario, when the potential Medicaid applicant places the home into a MAPT and later passes away, the home will transfer to the child with what is called a “step-up” in tax basis.
Meaning that the tax basis will receive an increase from the original purchase price of $50,000 to the home’s fair market value at the time of the Medicaid applicant’s passing (in this case $150,000).
Therefore, when/if the child later sells the home for the fair market value of $150,000, they will NOT pay gains tax because the tax-basis is now $150,000 – simply because the home was transferred into a MAPT rather than transferred as a straight out gift.
REMINDER: even if transferred into a MAPT, the potential Medicaid applicant CAN retain the right to live in, use and enjoy their home for as long as they wish, or are able – even for the remainder of their lifetime if they never do need Medicaid’s long-term in-patient healthcare benefits.
This is just one example. But I hope it illustrates that the overall savings from using a MAPT can be substantially higher in the end than any amount potentially saved now by transferring assets without using such a Trust.
Are there any other benefits of an irrevocable Medicaid Asset Protection Trust?
I’ve already discussed several benefits of a MAPT, but could there possibly be even more benefits?
Absolutely! There are many more additional benefits, including:
- Probate avoidance. THE most sought-after benefit of most Trusts! All assets within a Medicaid Asset Protection Trust are exempt from the probate process after the potential Medicaid applicant’s passing.
- The potential Medicaid applicant can reserve the right to use any real estate for their lifetime – allowing them to retain full use and enjoyment of the real estate (aka a “life estate”) if they never actually need long-term care.
- The potential Medicaid applicant can reserve the right to change or remove Trustees.
- The potential Medicaid applicant can reserve the right to change beneficiaries.
- Allows property to be sold during the potential Medicaid applicant’s lifetime without income tax consequences.
- If the potential Medicaid applicant is receiving any exemptions from taxes (Homestead, STAR, VA, Senior citizens, etc), they can still use those exemptions even if the premises is in an irrevocable Medicaid Asset Protection Trust.
DON’T DELAY! If you try to wait until the last minute to see if you might not need long-term in-patient healthcare, it will likely already be too late if the need does arrive – and a significant portion, if not all, of your life’s work can be lost to the healthcare facility.
If you think long-term in-patient care may ever be an issue for you, Contact Me today to discuss protecting yourself and your heirs by placing assets into a MAPT.
You will find that my Estate Planning services are among the most affordable anywhere in Minnesota.
TAX DISCLAIMER: I am NOT a tax professional or financial adviser. If you plan on using a Medicaid Asset Protection Trust for tax benefits or purposes, please contact your accountant or financial adviser.
PLEASE NOTE: I applaud your seeking out of Estate Planning information, but this article is for informational purposes only and is not a substitute for actual consultation with a qualified attorney.
You should not act on anything you read here without first consulting myself or another Minnesota Estate Planning attorney. Small details in your unique situation can result in a drastically different outcome.