How to Structure a Trust for Medicaid Eligibility

Planning for long-term care and Medicaid eligibility requires careful structuring of assets to ensure compliance with Medicaid rules while preserving wealth for beneficiaries. Trusts can be an essential tool in this process, but not all trusts are treated the same under Medicaid regulations. Understanding the different types of trusts and how they impact eligibility can help individuals protect assets while still qualifying for necessary benefits.

If you or a loved one are considering Medicaid planning, consulting with an experienced trust attorney can help navigate the complexities of trust structuring. Contact us online or call us at 414-253-8500 to discuss your estate planning and Medicaid eligibility needs.

Understanding Medicaid and Asset Limits

Medicaid is a federal and state-funded program that provides healthcare coverage to low-income individuals, including long-term care benefits for seniors and disabled individuals. However, Medicaid has strict income and asset limits, meaning applicants must have limited resources to qualify.

For 2024, Medicaid eligibility typically requires:

Asset Limits - Many states set a limit of $2,000 in countable assets for a single applicant.
Income Limits - Income limits vary based on the state and type of Medicaid coverage but are often set at or near the federal poverty level.
Look-Back Period - Medicaid enforces a 5-year look-back period (or 2.5 years for some states under home-based Medicaid), meaning any transfers or gifts made during this period can result in a penalty period of ineligibility.

Because Medicaid requires applicants to spend down their assets to qualify, individuals often use trusts as a strategic way to protect wealth while ensuring Medicaid eligibility.

Types of Trusts Used for Medicaid Planning

1. Medicaid Asset Protection Trusts (MAPTs)

A Medicaid Asset Protection Trust (MAPT) is one of the most effective tools for preserving assets while ensuring Medicaid eligibility.

How It Works: Assets placed in the MAPT are no longer considered the applicant's property, which helps reduce countable assets for Medicaid.
Irrevocable Trust: MAPTs must be irrevocable, meaning the creator (grantor) cannot access the assets once they are transferred into the trust.
Five-Year Rule: Assets in a MAPT are subject to the Medicaid 5-year look-back period, so early planning is essential.
Who Benefits?: Beneficiaries (such as children or loved ones) receive the trust assets after the grantor's passing, preventing Medicaid from reclaiming them.

2. Income-Only Trusts

An income-only trust allows applicants to retain income while transferring ownership of assets to a trust.

How It Works: The grantor can receive income generated by the trust (such as rental income), but the principal remains protected for beneficiaries.
Medicaid Considerations: While the income is still counted toward Medicaid eligibility, the principal is protected.
Best for: Individuals who need Medicaid benefits but want to maintain a source of income.

3. Testamentary Trusts for a Spouse

A testamentary trust is created through a will and takes effect after the grantor's death.

How It Works: If one spouse dies first, their will can direct assets into a testamentary trust for the surviving spouse.
Medicaid Benefits: Because the surviving spouse does not directly own the assets, they are not considered countable resources for Medicaid purposes.
Protection: The assets in the trust can be used for the well-being of the surviving spouse without affecting their Medicaid eligibility.

4. Special Needs Trusts (SNTs)

A special needs trust (SNT) is designed for individuals who receive Medicaid or disability benefits but have assets that could disqualify them.

How It Works: Assets are held in trust for the disabled individual, and a trustee manages the funds.
Medicaid Protection: The trust ensures that assets do not count toward Medicaid eligibility.
Types of SNTs:
- First-Party SNT: Created using the beneficiary's own assets (e.g., lawsuit settlement, inheritance).
- Third-Party SNT: Funded by family members or loved ones.

Comparison of Trust Types for Medicaid Planning

Type of Trust	Revocable or Irrevocable?	Impact on Medicaid Eligibility	Who Controls the Assets?	Best For
Medicaid Asset Protection Trust (MAPT)	Irrevocable	Assets not counted after the 5-year look-back period	Third-party trustee	Protecting assets while ensuring Medicaid eligibility
Income-Only Trust	Irrevocable	Income counts, but principal is protected	Third-party trustee	Individuals who need Medicaid but want a steady income
Testamentary Trust	Irrevocable	Assets do not count toward the surviving spouse's Medicaid eligibility	Executor of the will, then trustee	Spouses wanting to protect assets for the surviving partner
Special Needs Trust (SNT)	Irrevocable	Assets do not count for Medicaid or disability benefits	Trustee manages funds for the beneficiary	Disabled individuals receiving Medicaid benefits
Revocable Living Trust	Revocable	Assets are countable for Medicaid eligibility	Grantor retains full control	Avoiding probate but NOT Medicaid planning

How to Properly Structure a Trust for Medicaid Eligibility

Creating a trust for Medicaid eligibility requires careful drafting and adherence to state and federal regulations. The following steps outline key considerations when structuring a trust to preserve assets while ensuring compliance with Medicaid rules.

1. Choose the Right Type of Trust

As discussed earlier, not all trusts protect assets from Medicaid. The trust must be:

Irrevocable - The grantor must relinquish control of the assets.
Properly Funded - Assets must be transferred into the trust well before the Medicaid look-back period.
Managed by a Trustee - The grantor cannot serve as trustee; a third party must manage the trust.

A Medicaid Asset Protection Trust (MAPT) is often the preferred structure because it ensures assets are protected while still allowing the applicant to qualify for benefits.

2. Time the Trust Creation Carefully

Because Medicaid imposes a 5-year look-back period, any assets transferred into an irrevocable trust within this period can result in a Medicaid penalty period. To avoid this issue:

Plan Early - Setting up a trust at least five years before the need for Medicaid ensures full protection.
Avoid Last-Minute Transfers - Transferring assets too close to applying for Medicaid can lead to temporary disqualification.

3. Fund the Trust with Non-Countable Assets

To maximize Medicaid eligibility, the trust should be funded with assets that would otherwise count against the applicant. These may include:

Real Estate - A home that is not the applicant's primary residence.
Savings and Investment Accounts - Stocks, bonds, mutual funds, and cash assets.
Rental Properties - Income-producing real estate can be placed in the trust while providing income to beneficiaries.
Valuable Assets - Family heirlooms, jewelry, and other valuable items.

Certain assets, such as IRAs and retirement accounts, may need additional planning, as they are treated differently by Medicaid.

4. Ensure Proper Trustee Selection

The trust must be managed by an independent trustee-the applicant cannot serve as trustee. Common choices for trustees include:

A Trusted Family Member - A responsible adult who can oversee the trust.
A Professional Trustee - An attorney or financial professional experienced in Medicaid planning.
A Corporate Trustee - A bank or trust company that provides professional asset management.

The trustee is responsible for ensuring compliance with Medicaid rules and making distributions according to the trust's terms.

5. Specify the Use of Trust Assets

To maintain Medicaid eligibility, assets in an irrevocable Medicaid trust must not be directly accessible by the grantor. Instead, funds should be used for:

Housing and Maintenance Costs - Property taxes, home insurance, and maintenance.
Medical and Supplemental Needs - Healthcare expenses not covered by Medicaid.
Quality of Life Enhancements - Travel, hobbies, and personal care items for beneficiaries.

The trustee must ensure that distributions do not violate Medicaid's eligibility rules, such as direct cash payments to the grantor.

Common Mistakes to Avoid When Structuring a Trust for Medicaid

While setting up a trust can be an effective strategy, certain mistakes can jeopardize Medicaid eligibility. Avoid the following pitfalls:

1. Waiting Too Long to Plan

Many individuals wait until they require long-term care before considering Medicaid planning. Because of the five-year look-back period, waiting too long can result in delays or penalties.

2. Using a Revocable Trust

Revocable living trusts do not protect assets from Medicaid because the grantor retains control. Only irrevocable trusts shield assets from being counted.

3. Retaining Too Much Control Over the Trust

If the grantor maintains control over trust assets, Medicaid may consider the funds as "available resources," disqualifying them from benefits. The trust should be structured so that:

The grantor cannot dissolve or alter the trust.
The grantor does not receive direct distributions from the trust.
A third-party trustee has complete discretion over asset management.

4. Improperly Funding the Trust

Merely creating a trust is not enough-assets must be legally transferred into it. Common errors include:

Failing to retitle real estate into the trust's name.
Keeping financial accounts in the grantor's name, which Medicaid will still count.
Not updating beneficiary designations to align with the trust.

5. Ignoring Medicaid's Estate Recovery Rules

After a Medicaid recipient's death, the state may seek repayment from their estate. Proper trust structuring prevents assets from being subject to Medicaid estate recovery, ensuring they pass to heirs instead.

Alternatives to Medicaid Trusts

While trusts are a valuable tool for Medicaid planning, some individuals may benefit from alternative strategies, such as:

Spending Down Assets - Paying for long-term care or medical expenses before applying for Medicaid.
Purchasing Exempt Assets - Buying a Medicaid-exempt home, vehicle, or prepaid funeral plan.
Using Annuities - Converting assets into a Medicaid-compliant annuity that provides income while preserving eligibility.
Gifting Strategies - Transferring assets to family members outside the Medicaid look-back period.

Each approach has legal and tax implications, so working with an attorney is essential for determining the best strategy.

Contact a Medicaid Trust Attorney for Legal Guidance

Structuring a trust for Medicaid eligibility requires a deep understanding of legal requirements and careful financial planning. Mistakes in trust setup can lead to Medicaid disqualification or unintended financial consequences for beneficiaries.

At Heritage Law Office, we help individuals and families navigate Medicaid planning to protect their assets while ensuring access to necessary healthcare. Contact us today for personalized guidance on structuring a Medicaid-compliant trust.

📞 Call us at 414-253-8500 or fill out our online form to schedule a consultation.

Frequently Asked Questions (FAQs)

1. What is the five-year look-back period for Medicaid trusts?

The five-year look-back period refers to Medicaid's rule that examines any asset transfers made within five years before applying for benefits. If an individual transfers assets into a Medicaid Asset Protection Trust (MAPT) within this period, they may face a penalty period during which they are ineligible for Medicaid. Proper planning ensures that transfers occur outside this window to avoid penalties.

2. Can I access the funds in a Medicaid Asset Protection Trust?

No, once assets are placed in a Medicaid Asset Protection Trust (MAPT), they are no longer under the control of the grantor. The trustee manages the assets for the benefit of the designated beneficiaries. However, certain trust structures, such as income-only trusts, may allow the grantor to receive income from the trust while keeping the principal protected.

3. How does a trust prevent Medicaid estate recovery?

Medicaid estate recovery allows the state to reclaim the cost of care from a recipient's estate after they pass away. By placing assets into an irrevocable trust, those assets are no longer part of the grantor's estate, preventing Medicaid from seizing them. This ensures that assets can pass to heirs instead of being used for Medicaid repayment.

4. Is my home protected if I put it in a Medicaid trust?

Yes, transferring a home into a Medicaid Asset Protection Trust (MAPT) can protect it from Medicaid spend-down and estate recovery. However, it must be done at least five years before applying for Medicaid to avoid penalties. Additionally, some states allow applicants to keep a primary residence under Medicaid exemptions, but a trust provides additional long-term protection.

5. Can a spouse still access funds if one partner applies for Medicaid?

Yes, a Medicaid-compliant trust can be structured to protect assets for a healthy spouse (often called the "community spouse"). Testamentary trusts, spousal annuities, and properly structured irrevocable trusts can ensure that the non-Medicaid spouse retains access to necessary funds while not jeopardizing Medicaid eligibility for the applicant.