Using an Irrevocable Trust to Prepare for Long-Term Care

The costs of long-term care are considerable. Nursing home care in North Carolina averages $8,000 per month. The only public benefit program that can help to pay for nursing home care is Medicaid – and in order to qualify, applicants must often “spend down” a considerable amount of their private resources.

One type of irrevocable trust, called a Medicaid Asset Protection Trust (MAPT) can help. By using a MAPT, an individual or a couple can protect a certain amount of resources so that they may be preserved for their future beneficiaries, or for themselves to pay for supplemental services if they are in a nursing home.

This is how it works. Using an example, Jim and Sally Smith are now in retirement and they are concerned that at some point in the future one or both of them may need long-term care. They have enough income and savings to cover their current needs, and they also have a nest egg of approximately $200,000 that they eventually want to pass on to their children. Jim and Sally can place these funds into a MAPT. They name one of their children as the Trustee to manage the trust. At that point Jim and Sally give up their control of the resources so that they cannot ever be counted against them if they were to need Medicaid in the future. It is important to note that the resources must be in the trust for five years (the Medicaid lookback period) in order to completely escape being countable resources under Medicaid.

The MAPT offers several advantages over outright gifting of funds to their children:

1.         The funds in the trust may be protected against creditors of their children.

2.         The funds in the trust may be protected against divorce or lawsuits against involving their children.

3.         The funds in the trust may be used indirectly to supplement Jim and Sally’s care if they were receiving Medicaid. “Indirectly” means that the children would have to voluntarily give the resources to their parents.

4.         The funds and resources receive a “step-up” in basis, so that the children would pay less capital gains tax after the death of Jim and Sally.

For these and other reasons, a MAPT may be a good option for many retirees. We here at Hillsborough Wills & Trusts would be happy to provide you with additional details and a consulting session to explain more.

Colin Austin