More so in New York than in any other state, Medicaid is not “just for poor people.” Medicaid serves millions of people in New York, many of whom own homes and have investments and savings. They and their families would be devastated financially without Medicaid assistance for their long-term care needs. Once someone needs long-term care, it quickly becomes clear that money is pouring out of their bank account with terrifying rapidity, and with no end in sight.

 

Some mistakenly believe that Medicare will cover their needs.  It will not.  Health or medical insurance does not cover long-term care.  Only long-term care insurance will cover long-term care and very few people have a policy.  And for those who have a policy, often the coverage and benefits are inadequate.

Most people will come face to face with the shocking fact that even a modest amount of home care could cost $100,000 per year, or that assisted living or nursing home care could cost $150,000 to $200,000 per year.  Multiply these numbers by 3, 4, or 10 years of increasing long-term care needs.  Most people don’t have this kind of money to spend without rapidly depleting their life’s savings and jeopardizing the ownership of their home.  And, of course, the fees for these services rise every year.

Fortunately, residents of New York can take steps to avoid financial disaster.  One of the most effective strategies is the Medicaid Asset Protection Trust (“MAPT”).  Here are five reasons why the MAPT is so valuable and effective.

1. A  Medicaid Asset Protection Trust will facilitate eligibility for Medicaid

In order to be Medicaid eligible, you can have only a very limited amount of assets in your name.  When you create and fund a MAPT, think of the Trust as another person.  The trust assets no longer belong to you and cannot be counted by Medicaid in determining your eligibility.  Once the amount of your assets is below the eligibility level, you can quickly obtain Community Medicaid benefits, including home care or assisted living care. 

For Community Medicaid, there is an income limit, but your income is NOT a factor in determining Medicaid eligibility.  In fact, if your Medicaid Asset Protection Trust contains investments that produce income, e.g., interest or dividends, you can continue to receive all of the investment income even though you no longer own the underlying assets.  Receipt of this income will not affect your eligibility for Medicaid.  However, you may need to protect your so-called “surplus income” in a different kind of trust, the Pooled Income Trust.

While creating and funding a MAPT will allow you to quickly attain eligibility for Community Medicaid, the path to Medicaid Nursing Home eligibility may take more time due to the five-year “look back.” 

2. A Medicaid Asset Protection Trust helps your money last longer

The goal of the Medicaid Asset Protection Trust is to protect your assets and make them last as long as possible, so that you (and your spouse and family) can maintain a comfortable lifestyle.  You may have a mortgage or other financial obligations or want to modify your home to make it safer and easier to live in as you age, or need to replace appliances, the roof, or fix the plumbing.

While the assets in the MAPT are no longer subject to your control, the Trustee can be given the authority to distribute trust assets to others, typically to a Co-Trustee or other family members.  They can use the assets distributed to them to pay for anything that you may need or want.  When you choose the Trustee(s) and beneficiaries of your Asset Protection Trust, you will want to keep this possibility in mind.

Creating an MAPT is not a “loophole” or an effort to “hide” your money.  Protecting your money and property and attaining eligibility for Medicaid are not improper or unethical goals – they are an optimal outcome.  Medicaid is very well aware of the use of the Medicaid Asset Protection Trust, and will review your trust in the application process.  Elder Law attorneys have been using this strategy for years.

3. Placing your assets in an MAPT protects them from important risks

Most seniors are planning to leave their assets to their children or to other family members.  When they learn that they need to reduce the amount of assets in their own name in order to qualify for Medicaid benefits, the obvious conclusion to many is to give their assets now to their family members.  The recipients of such gifts use these funds to pay for whatever the senior may need or want.  This can be the simplest path to Medicaid eligibility, but it is problematic for a number of reasons:

1. If the recipient of the gift incurs a debt or liability, what you think of as “your” money will be exposed to a claim by their creditor;
2. If the recipient of your gift is married and subsequently becomes involved in a  divorce proceeding, “your” assets could wind up in the hands of their spouse;
3. If the recipient of your gift pre-deceases you, "your" money will be distributed as spart of their estate:
4. While unsuspected and perhaps unlikely, there is always a possibility that “your” money will misused by the recipient of your gift;
5. The recipient of your gift will have carry-over basis in the investments and property given to them.  This means that the opportunity to avoid capital gains tax on the appreciation in value of the transferred assets that accrue during your lifetime will be lost.

An Asset Protection Trust can protect your assets from all of these risks, and afford your beneficiaries a “step-up in basis” of appreciated assets, meaning that they will avoid capital gains tax (see below).

4. A Medicaid Asset Protection Trust affords a step-up in basis to its beneficiaries

If you should decide to sell your home or other investments that have appreciated in value over the years, you understand that you may be required to pay capital gains tax.  The tax would be calculated on the amount of the gain, i.e., the difference between the amount you paid for the asset and the net proceeds of sale.  What you paid for the asset is called your “tax basis.”

As stated above, if an asset is gifted during your lifetime, the recipient gets carry-over basis, i.e., the same tax basis that you have.  If the recipient sells that asset, they will pay the same capital gains tax that you would have paid had you sold the asset.  If the asset sold was your primary residence but it did not become their primary residence, they would pay even more tax than you would have paid because they would not qualify for the tax exemption available upon the sale of a primary residence.

However, if your beneficiary inherits the same assets from a Medicaid Asset Protection Trust, the beneficiary receives a step-up in tax basis to the fair market value of the asset as of your date of death.

Here is a hypothetical example:  assume you purchased your home 30 years ago for $100,000.   Upon your death, the home is worth $800,000 and your children want to sell it and divide the proceeds.  If you had transferred ownership to your children during your lifetime, they will pay capital gains tax on the $700,000 increase in value of the home that accrued during your lifetime when the sell the property.  However, if your children had inherited the property from you under your MAPT, they will not pay any capital gains tax on the $700,000 increase in value.

5. A MAPT can serve as your estate plan, and avoid probate

Every Last Will and Testament, without exception, is unenforceable until it is filed with a Probate Petition in the Surrogate’s Court, and the Court determines that it is a valid Will and issues Letters Testamentary to the nominated Executor.  Unfortunately, filing the petition is only the first step.  Potential beneficiaries can demand discovery and  challenge the Will as discussed below.  Even when a Will is uncontested, it can take months (sometimes more) for Letters Testamentary to be issued.  Only at that point does the Executor have the authority to collect the estate assets, pay expenses and creditors, and distribute the remaining assets to the beneficiaries named in the Will. The probate procedure can be expensive, time-consuming, and aggravating.

A Medicaid Asset Protection Trust will similarly contain your wishes and instructions regarding the distribution of the assets that it owns to your beneficiaries named in the Trust.  The distribution of assets from the Trust can be handled privately and without any court involvement at all.  It is a far more efficient – and cost efficient – process than probate, and it avoids all the unknowns, delays, and expenses that come with a court proceeding. 

The MAPT is far better at avoiding disputes regarding the estate than if you have a Will.  Probate rules require that “distributees” (next of kin down to first cousins) be notified of the proceeding.  Distributees are entitled to conduct discovery, i.e., they can require production of relevant documents and information and conduct depositions of witnesses.  They are then entitled to object to the validity of the Will on various grounds, which will result in further delay and expense.  Some cases literally take years to resolve.

When you have a MAPT, however, nobody is entitled to notice apart from the beneficiaries named in the trust.  Nobody is automatically entitled to discovery and nobody is automatically entitled to object.  While a disgruntled family member can always file a lawsuit against a trust, they face an entirely different procedure, with significant obstacles in their path.

Conclusion

For all these reasons, a Medicaid Asset Protection Trust is a compelling strategy.  It is extremely reliable and widely accepted as the “gold standard” in Elder Law planning.  Learning more by having a consultation with an Elder Law attorney would be a valuable step in determining whether a MAPT is appropriate for you.