Given the escalating costs of long-term care (in 2022 Orange County nursing homes cost an average of over $13,000 per month), people are anxious to shelter their hard-earned assets from the potentially devastating financial effects of a lengthy stay in a nursing home. So what are your options?

Of course, long-term care insurance is always an option, but too often people don’t qualify medically for coverage. For those who do qualify, the typically exorbitant full-coverage premiums are too much for most for most to pay.

Medicaid is also an option, but a New York resident in 2022 doesn’t qualify for nursing home Medicaid coverage if his or her “countable resources” exceeds $16,800. While a person may choose to “spend down” assets to qualify for Medicaid, most people prefer to preserve as much of their assets as possible for themselves and their heirs.

Still, most wait too long to take measures to protect their assets. In fact, 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 2022 in the Hudson Valley, a non-exempt transfer of $200,000 of assets made anytime during the 5-year “look-back period” will disqualify an “otherwise eligible” person. That means that a person with $16,800 of assets or less at the time of application will be ineligible from receiving nursing home Medicaid coverage for about 15 months.

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 planning strategy 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 Medicaid Asset Protection Trust (MAPT).

 

What is 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.

But the term “irrevocable” is not as scary as it sounds. Should a health care crisis arise within five years after a MAPT has been funded, New York law (and the law of many other states) provides a simple mechanism for “undoing” the MAPT that otherwise qualifies as an irrevocable trust for Medicaid purposes.

 

Ideally, when should we fund a MAPT?

Transfers of assets to a properly structured MAPT 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 5-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.

 

What are the advantages of a MAPT?

• 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 don’t foresee a necessity to access the principal but want the income, this feature holds great appeal.
• The trust structure 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.).
• If trust assets are distributed to a child or other beneficiary, nothing legally prevents the recipient from making a gift to their parent. Since that gift is of the child’s own assets and is not a distribution to the parent directly from the trust, that gift does not violate the trust prohibition on principal assets being distributed to the trustmaker.
• MAPT allows you 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.
• MAPT assets also have the widely desired benefit of probate avoidance. Trusts are “testamentary substitutes,” meaning that assets owned in a MAPT can pass immediately upon the trustmaker’s death to the trust beneficiaries without having to be subject to the court probate process, which is required for assets owned in a decedent’s individual name. But to take advantage of the probate avoidance feature of a MAPT, care must be taken to not only transfer desired assets to the MAPT but ensure that the MAPT is named a beneficiary of assets that the trustmaker will retain in their own name, such as checking and savings accounts used for daily living expenses.
• 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).I routinely refer to the MAPT as the “Swiss army knife” of estate planning tools, because it (1) provides superior asset protection, (2) avoids probate and streamlines the estate administration process, (3) provides several tax planning advantages, and (4) can be structured with enormous flexibility for changing circumstances. Everyone 60 or older should discuss with an experienced elder law attorney whether a MAPT is right for their circumstances.

Richard J. Shapiro, Esq., is a Certified Elder Law Attorney by the National Elder Law Foundation, as accredited by the American Bar Association, and is a member of the Council of Advanced Practitioners for the National Academy of Elder Law Attorneys. He has been designated a top-25 in the Hudson Valley “Super Lawyer” and has the highest (AV) rating from Martindale-Hubbell. Mr. Shapiro, who is accredited to practice before the Department of Veterans Affairs, is the author of “Secure Your Legacy: Estate Planning and Elder Law for Today’s American Family.” He is a partner with the Orange and Sullivan County law firm of Blustein, Shapiro, Frank & Barone, LLP. Mr. Shapiro is a member of Wealth Counsel, 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 purposes only and is not, nor is it intended to be, legal advice.