A MAPT may be appropriate for someone who does not qualify for long-term care insurance or who does not want to purchase long-term care insurance and pay an expensive premium indefinitely.
A MAPT is a vehicle that can hold assets that a person wants to protect from long-term care costs outside of their legal ownership.
By way of background, Medicaid is a state-run program that provides healthcare coverage to individuals. Often, due to the high costs of long-term care, Medicaid is used to help individuals pay for nursing home or at-home care. To be eligible for Medicaid, an individual’s income and assets must fall below certain thresholds. However, many individuals may have assets that exceed these limits, which can make them ineligible for Medicaid benefits.
A MAPT can help individuals qualify for Medicaid benefits while still preserving some of their assets.
With a MAPT, the individual (known as the Grantor) transfers assets into an irrevocable trust, which is managed by a trustee. The trust typically contains specific provisions that dictate how the assets are to be managed and distributed. The individual who created the trust may also receive income from the trust during their lifetime.
Five years from the date that the last asset is transferred to the trust, the entire principal of the trust is protected from skilled nursing home costs. Medicaid has a lookback period of five years to discourage individuals from transferring assets quickly to qualify for Medicaid. Therefore, it is important to plan for long-term care early and transfer assets into the trust before the need for care arises.
Even though a MAPT is irrevocable, if properly drafted, it can be written so that it is still flexible. The grantor, the person who funds the trust, can retain the right to change the lifetime beneficiaries of principal and the ultimate residuary beneficiaries of the trust through use of a limited power of appointment. For example, should the grantor have a dispute with one of the beneficiaries, he or she can remove that beneficiary from the trust. Additionally, a grantor can add beneficiaries to the trust after it is established. The grantor can also retain the right to remove one or more of the trustees for any reason. These flexibilities do allow some control for the grantor.
One highly desirable feature of the trust is that the beneficiaries will receive a step-up in cost basis on most property in the trust (such as real estate and stocks) at the time of the grantor’s death.
This means that the beneficiary will only be liable for capital gains tax on the difference between the value of the asset as of the grantor’s date of death and the value on the date that the assets are sold.
If established as a grantor trust, income on the trust can be taxed to the grantor as well. Since trust tax rates are higher, this is attractive for the grantor. This will allow the grantor to pay the income tax on the trust investments as he or she did prior to the transfers to the trust.
A trust can also avoid probate.
A trust does not need to be probated in Surrogate’s Court like a will does when he or she dies in order to distribute the trust assets to the beneficiaries. Avoiding probate is typically a good thing as you can eliminate court filing fees and time delays that are associated with the probate process. Additionally, in some states where Medicaid has an estate recovery program, not having an estate open through probate protects the decedent’s property as it is distributed to the beneficiaries.
Additional asset protection is offered through an ongoing trust.
A trust protects the assets from the beneficiaries’ creditors, which is not the case with an outright gift to a child. Additionally, if any beneficiary is going through a divorce proceeding, the assets are also protected within the trust.
Clearly, a MAPT can be beneficial in certain situations. If you have questions about whether a MAPT would be the right solution for you, please contact Andrea Gray, Esq., Vice President, Estate Strategies at Howe & Rusling.