Given the escalating costs of long-term care (Orange County nursing homes currently cost an average of almost $12,000.00 per month), not surprisingly, people are searching for ways to shelter their hard-earned assets from the potentially devastating financial effects of a lengthy stay in a nursing home. If long-term care insurance is not an option, a “Medicaid Asset Protection Trust,” or “MAPT,” is an extraordinary asset protection tool.
Long-term care is paid for from three primary sources: (1) the person’s own assets; (2) long-term care insurance; or (3) the Medicaid program. In 2017, a person does not qualify for nursing home Medicaid coverage until they have assets of not more than $14,850. While a person may choose to “spend down” their assets to qualify for Medicaid, most people prefer to preserve as much of their assets as possible for themselves and their heirs.
The problem with waiting too late to protect your assets is that virtually all asset transfers (other than a transfer to a spouse or a disabled child) made within five years of applying for nursing home Medicaid coverage results in a period of Medicaid ineligibility. In 2017 in the Hudson Valley, a non-exempt transfer of $200,000 of assets made during the 5-year “look back period” will disqualify an “otherwise eligible” person–meaning a person with $14,850 of assets or less at the time of application–from receiving nursing home Medicaid coverage for over sixteen months. Understandably, a nursing home will not be keen on letting a person reside in the facility for any period of time without paying for their care. Since Medicaid will not initially pick up the tab, the facility will seek payment from the resident–and the family members to whom the assets were transferred during the look-back period–and often will sue if payment is not made to cover the cost of care.
Proactive planning–that is, engaging in asset preservation techniques at least five years before long-term care is likely needed–is the best way to preserve one’s assets . The most effective way to maximize the assets that can be protected from a Medicaid “spenddown” is to make a “gift with strings attached” by creating and funding assets into a MAPT.
A MAPT is simply a particular type of irrevocable trust. Why irrevocable? The garden variety revocable trust is not an effective asset protection vehicle; since the trustmaker has full access to the assets, under Medicaid rules the assets are deemed “available” to the trustmaker and must be “spent down” before the trustmaker becomes eligible for Medicaid coverage.
Transfers of assets to a properly structured MAPT, however, will be deemed a “transfer” of assets for Medicaid purposes as of the date the assets are funded into the trust. This feature is important, because for effective Medicaid planning we want to “start the clock” for the five-year look back period sooner rather than later. The sooner the clock begins to run, the sooner we get through the 5-year look back period, thereby protecting all the trust assets (as well any appreciation of those assets) should the trustmaker later need long-term care.
A significant advantage of the MAPT over outright gifts to children is that the parent retains all the income from the trust, with the income taxed to the parent rather than the child, often at a lower income tax rate. For clients who have no intention to use the principal but need the income, this feature holds great appeal. Also, the trust structure also ensures that the trustmaker has effectively made a gift “with strings attached.” The parent can retain control over the trust operation by serving as Trustee, and can even retain the power to change the ultimate beneficiaries of the trust (i.e., the parent can disinherit a child and give their share to a grandchild, another child, etc.).
Another benefit of the MAPT is the ability to avoid capital gains taxes upon the beneficiary’s ultimate sale of the assets. So long as the MAPT is properly structured as a complete “grantor” trust, and as long as the assets are held in the trust until the parent’s death, those assets will receive a “step up” in cost basis. The assets will be revalued for income tax purposes using the date of death value. For example, if a share of stock with an original cost basis of $10 is given outright to a child and then sold for $100, the child will have a taxable gain of $90. If the same stock is placed in the MAPT and held until death with a date of death value of $100, the same sale will produce no taxable gain.
Transferring a primary residence to a MAPT retains the “step up” in basis advantage, and provides the further benefit that the trustmaker retains (1) a lifetime right to remain in the residence and (2) all the property tax exemptions they may already have (i.e., STAR, Veterans, etc.). In addition, should the house be sold during the trustmaker’s lifetime, the trustmaker will remain eligible for the capital gains tax exemption exclusively available to home sellers ($250,000 exemption for an individual seller, $500,000 for a married couple).
Finally, should a health care crisis arise within five years after a MAPT has been funded, New York law provides a mechanism for “undoing” the MAPT notwithstanding that it otherwise qualifies as an irrevocable trust for Medicaid purposes.
Richard J. Shapiro is a partner with the Hudson Valley law firm of Blustein, Shapiro, Frank & Barone, LLP. He is the author of the 2017 book Secure Your Legacy: Estate Planning and Elder Law for Today’s American Family published by Archway Publishing. Mr. Shapiro, who is “AV” rated by Martindale-Hubbell and named a “Super Lawyer” in Estate Planning and Probate law, is a member of WealthCounsel, ElderCounsel, the National Academy of Elder Law Attorneys, the New York State Bar Association (Trusts and Estates and Elder Law Sections), and the Hudson Valley Estate Planning Council. You can reach him at (845) 291-0011 or at [email protected]. The information in this article is for general information only and is not, nor is it intended to be, legal advice.