Medicaid is a means-tested program with strict asset limits for eligibility. For individuals facing the potential need for long-term care, the question of how to qualify for Medicaid while preserving assets for family members is a significant concern. Trusts can potentially protect assets while allowing Medicaid eligibility, but federal law under 42 U.S.C. §1396p imposes significant restrictions on how and when this works. The 60-month lookback period is the critical constraint that governs all Medicaid trust planning. It is also important to understand that a trust for Medicaid asset protection serves a fundamentally different purpose than a domestic asset protection trust designed for creditor protection, and the two should not be confused.
Medicaid Eligibility Basics
Medicaid pays for long-term care including nursing home stays and certain home care services. To qualify, an applicant must meet asset limits that vary by state but typically fall in the range of $2,000 to $3,000 for an individual. Certain assets are exempt from this calculation, including a primary residence up to certain equity limits, one vehicle, personal belongings, and prepaid burial arrangements. All other countable assets must be “spent down” before Medicaid will begin paying for care.
This spend-down requirement is why trusts enter the conversation. Transferring assets to a trust may remove them from the countable asset calculation, potentially allowing someone to qualify for Medicaid while preserving wealth for the next generation. However, federal law places strict limits on when this strategy actually works.
The Federal Lookback Period Under 42 U.S.C. §1396p
When someone applies for Medicaid, the state reviews all transfers made during the 60 months prior to the application. This five-year lookback period is codified in 42 U.S.C. §1396p(c)(1)(B)(i). Transfers to trusts made within this window trigger a penalty period during which Medicaid will not pay for care.
The penalty period is calculated by dividing the value of the transferred assets by the average monthly cost of nursing home care in the state. For example, if someone transferred $100,000 to a trust and the average monthly nursing home cost in their state is $10,000, they would face a 10-month penalty period. During this time, the applicant must pay privately for their care. This penalty can be financially devastating for families who attempted last-minute planning.
How Medicaid Views Trusts Under Federal Law
Federal law draws a sharp distinction between revocable and irrevocable trusts. Under 42 U.S.C. §1396p(d)(3)(A), the entire corpus of a revocable trust is treated as a countable asset for Medicaid purposes. Because the grantor can revoke the trust and access the funds at any time, the trust provides zero Medicaid asset protection. This is a complete bar with no exceptions.
Irrevocable trusts receive different treatment under 42 U.S.C. §1396p(d)(3)(B), but the rules remain strict. If any circumstances exist under which payment could be made to or for the benefit of the grantor, that portion of the trust is countable. Only when no circumstances allow payment to the grantor does the funding get treated as a transfer subject to the five-year lookback. The trust must be truly irrevocable, and the grantor must give up all access to the principal.
There is an important distinction between income and principal in this analysis. Trusts can be structured to allow income to flow to the grantor while the principal remains completely inaccessible. Income received by the grantor counts toward income eligibility calculations. However, principal that is truly inaccessible may not be counted as an asset once the lookback period has passed.
Structure of a Medicaid Asset Protection Trust
A properly structured Medicaid Asset Protection Trust has several essential features. The trust must be irrevocable and cannot be changed or revoked after creation. The grantor cannot serve as trustee. The grantor cannot have access to principal under any circumstances whatsoever. The grantor may receive income from the trust, though that income will count for eligibility purposes. Someone other than the grantor, typically adult children, must be named as the beneficiaries of the principal.
The most common structure is an “income-only trust.” Under this arrangement, the grantor can receive income generated by trust assets but has no access to the principal itself. Upon the grantor’s death, the principal passes to the named beneficiaries. This structure can also allow the grantor to continue living in a home that is held by the trust.
Trustee selection requires careful consideration. The trustee must be someone other than the grantor, typically an adult child or other trusted family member. The trustee manages the assets, makes investment decisions, and can distribute income to the grantor according to the trust terms.
The Five-Year Planning Horizon
Timing is everything in Medicaid planning. The trust must be funded at least five years before a Medicaid application to avoid the penalty period. If care is needed within that five-year window, the penalty will apply and the family may face significant out-of-pocket costs.
This reality means that Medicaid Asset Protection Trusts cannot serve as emergency planning when nursing home admission is imminent. The trust should be established when the grantor is in good health, well before any anticipated need for long-term care. Earlier is always better because it allows time for unforeseen circumstances and ensures the lookback period will have passed when care is eventually needed.
If someone needs care within five years of funding the trust, the penalty period must be served. The family may need to pay privately, use other assets, or explore additional planning options that vary by state.
MAPT vs. DAPT: An Important Distinction
Medicaid Asset Protection Trusts and Domestic Asset Protection Trusts serve fundamentally different purposes and have different structures. A MAPT is designed to qualify for Medicaid by removing assets from countable resources. A DAPT is designed to protect assets from creditors while the grantor remains a beneficiary.
The structural differences follow from these different purposes. In a MAPT, the grantor typically cannot access principal at all. In a DAPT, the grantor can be a discretionary beneficiary of principal. The governing law also differs. MAPTs are governed by federal Medicaid law under 42 U.S.C. §1396p, while DAPTs are governed by state asset protection trust statutes.
A common question is whether a DAPT can also serve as a MAPT. The answer is generally no. If the grantor can receive distributions from a DAPT, that portion of the trust is countable for Medicaid purposes. The DAPT structure defeats the Medicaid planning purpose. Families must choose which goal is primary when designing their trust strategy.
Limitations and Considerations
A MAPT does not protect against all Medicaid-related concerns. It does not necessarily protect against Medicaid estate recovery after death, which varies significantly by state. A home held in a MAPT may still be subject to estate recovery in some jurisdictions. Income generated by the trust counts toward eligibility calculations. And the trust provides no protection if the applicant needs care within the five-year lookback period.
State variations add another layer of complexity. Medicaid is a jointly administered federal and state program, and states have discretion in how they implement many provisions. Rules regarding homes held in trust, estate recovery, and other details vary considerably. Working with an attorney familiar with your specific state’s rules is essential.
Gift tax considerations also apply. Funding an irrevocable trust constitutes a completed gift for federal gift tax purposes. The transfer may use a portion of the lifetime gift tax exemption, and a gift tax return may be required.
Conclusion
A trust for Medicaid asset protection must be irrevocable and funded at least five years before applying for benefits to avoid the penalty period. Federal law under 42 U.S.C. §1396p strictly governs how Medicaid evaluates trusts, and the rules leave little room for creative interpretation. MAPTs serve a fundamentally different purpose than DAPTs designed for creditor protection, and the two structures are not interchangeable. Proper planning requires understanding both federal law and the specific rules of your state. For questions about how asset protection trusts fit within your overall planning, consider consulting Mark Pierce and Matt Meuli at Wyoming Asset Protection Attorney.