Understanding the Pros and Cons Medicaid Asset Protection Trusts

By Joshua Berkley

Are you concerned about having enough assets to care for yourself or your loved ones as you age and might be in need of assistance for your medical expenses, as well as your daily long-term care living situation? There is planning that can be done with the help of experienced elder law attorneys to help in this area.

Medicaid Asset Protection Trusts (or Medicaid Planning Trusts), which are also a type of Irrevocable Trusts, are often used as estate planning tools to protect assets from being counted as available resources when applying for Medicaid. Medicaid is both a state and federal program that can help manage your medical costs if you have limited income and resources. However, you need to be aware of the strict asset and income limits that individuals must meet to be eligible for long-term care benefits.

Planning is crucial in this area because Medicaid often requires applicants to “spend down” their assets to a certain level before they can qualify for assistance. You will want to be aware of the pros and cons of such types of trusts as you consider whether this is the right situation for you or your loved ones.

Pros of a Medicaid Asset Protection Trust

If you are considering a Medicaid Spending Trust, these may be some pros or advantages to consider:

  • Asset Protection: Assets placed in the trust are not considered countable assets for Medicaid eligibility purposes. This means that these assets will not be counted towards the individual’s Medicaid asset limit, allowing them to qualify for Medicaid without having to spend down their assets, while still preserving some wealth for their heirs.
  • Nursing Home Coverage: Medicaid can cover the cost of long-term care in a nursing home, which can cost a fortune in out-of-pocket expenses, often between $7,000 – $10,000 every month.
  • Income Protection: Income-producing assets placed in the trust can provide a source of income to the trust beneficiaries, usually the children or other family members of the person (known as the “grantor”) who established the trust.
  • Retain Some Control Over Assets: While the assets are placed in the trust, the individual can still retain some level of control over them, depending on the terms of the trust. They may continue to receive income from the trust or make decisions about how the assets are invested or distributed to beneficiaries.
  • Preserving Inheritance For Beneficiaries: Medicaid planning trusts allow individuals to preserve a portion of their assets to pass on to their heirs or beneficiaries after their death. This can be particularly important for individuals who want to leave security to their loved ones without using up all of their assets on long-term care costs.
  • Flexibility in Planning: Medicaid planning trusts can be designed to satisfy the individual’s specific goals and circumstances. Different types of trusts, such as offer varying levels of flexibility over the assets, allowing individuals to make sure the document is drafted to satisfy all of their goals.

Cons of a Medicaid Asset Protection Trust

Medicaid Spending Trusts can also have some disadvantages, which is why it is important to be aware of before deciding to set up one. Some cons of a Medicaid Asset Protection Trust include:

  • Irrevocability: Once assets are placed in the trust, the decision is generally irreversible. The individual loses control of these assets and cannot get them back if their circumstances change. It’s a permanent decision that requires careful consideration.
  • Five-Year Lookback: Medicaid applies a five-year lookback period for asset transfers. If an individual transfers assets to a trust and applies for Medicaid within less than five years, they may be subject to penalties, and their Medicaid benefits could be delayed.
  • Grantor Control Is Shifted To Trustee Control: The person who establishes the trust (the grantor) cannot be the trustee of the Medicaid Planning Trust. Therefore, they give up direct control of the assets placed in the trust.
  • Limited Flexibility In Its Operation: The terms of an irrevocable trust are usually fixed and can not easily be changed. This could be a problem if the grantor’s needs or circumstances no longer align with the terms of the trust.
  • Tax Implications: There may be tax implications when transferring assets into a trust, depending on the specific type and value of the assets. It is advisable to consult with your tax advisor before setting up such a trust.
  • Potential for trustee mismanagement or abuse: If the trustee does not manage the trust responsibly or uses the assets for their own benefit, the trust could lose value, which might affect the quality of care the grantor can receive. This is why it’s important to have a trustworthy and competent person as your trustee.
  • State-specific Rules: Medicaid rules can vary by state. What works in one state may not work in another, and there can be additional Kentucky-specific rules that need to be followed.

Have Questions Regarding a Medicaid Asset Protection Trust? Contact Berkley Oliver PLLC Today

It is important to work with an experienced elder law attorney who focuses on Medicaid planning to ensure that you understand the implications and that you are setting up the trust correctly. This is a complex area of law with significant financial and potential tax implications. Contact Berkley Oliver PLLC so that we can provide guidance tailored to your unique situation and make sure that you understand the consequences of any actions that you decide to take in this area.

About the Author
Josh Berkley is an attorney and owner at Berkley Oliver PLLC who helps individuals implement plans to protect their assets and their loved ones. Josh focuses his practice in the areas of Estate Planning, Probate, and Elder Law.  From assisting young parents in making a plan to provide for their children, to helping senior clients qualify for Medicaid, Josh works with clients to create estate plans and life plans tailored to each person’s specific goals. He also helps clients with a wide variety of important legal documents such Wills, Trusts, Powers of Attorney, Healthcare Surrogate Designations, and Living Wills. If you have any questions regarding this article, contact Josh here.