Do you need both a Medicaid Asset Protection Trust (MAPT) and a revocable living trust?

A Medicaid Asset Protection Trust can serve as a financial fortress against the staggering costs of long-term care and Medicaid estate recovery. This specialized irrevocable trust creates a legal barrier between you and certain assets, making them uncountable for Medicaid eligibility purposes after the five-year look-back period. Also, it can protect your primary residence from estate recovery and provide an inheritance for your loved ones.

Without a MAPT, if you need nursing home care, you'd have to spend down nearly all your assets before qualifying for Medicaid. With a properly structured MAPT, you can protect significant assets while still qualifying for benefits. However, this protection comes with strict rules:

• Once assets are placed in the MAPT, you cannot access the principal.
• You may be able to receive some income from the trust assets.
• The transfer must occur at least five years before applying for Medicaid.
• Assets in the trust must be managed by your chosen trustee.

While a MAPT focuses on asset protection for Medicaid qualification and estate recovery purposes, a revocable living trust serves as your estate's command center during your lifetime. You maintain complete authority over the assets while gaining significant benefits that include:

• Immediate access to trust assets whenever needed.
• Ability to buy, sell or trade assets within the trust.
• Power to change beneficiaries or trust terms.
• Complete control over income and principal.
• Privacy protection for your estate and beneficiaries.
• Avoidance of probate’s expenses, delays, burdens and loss of control.

However, this flexibility means assets in your revocable trust remain countable for Medicaid purposes. You can't have it both ways – either you maintain control (a revocable trust) or you get asset protection (an irrevocable MAPT). This is why strategic allocation between both types of trusts is crucial – you use the MAPT to protect your home and other assets you want to preserve while maintaining enough assets in the revocable trust to support your current lifestyle.

When it comes to asset allocation between these trusts, careful consideration of your current needs and future goals is essential. The MAPT can be suitable for income-producing real estate, non-qualified investment accounts you won't need to access, life insurance policies, family vacation properties, valuable collections or artwork, business interests you don't actively manage and securities portfolios designated for future generations.

Conversely, the revocable living trust works best for regular and rainy-day funds. The revocable living trust should be funded with enough assets to maintain your lifestyle and provide for emergencies before any need for Medicaid. This might include some liquid investments, checking and savings accounts, actively managed business interests, vehicles and personal property.

Successfully implementing both trusts requires a team approach. Your estate planning attorney drafts trust documents, ensures legal compliance and advises on asset protection strategies. Your financial professional assists with asset allocation, manages investment strategies, monitors trust funding and projects future income needs. Your tax professional advises on tax implications, handles trust tax returns, recommends tax-efficient strategies and monitors compliance requirements.

Medicaid's treatment of retirement accounts like IRAs and 401(k)s varies significantly by state. In some states, these accounts are automatically exempt from Medicaid asset calculations. Other states exempt retirement accounts only if they are in payout status, although payouts and required minimum distributions (RMDs) count as income for Medicaid eligibility. Several states automatically exempt a non-applicant spouse's retirement accounts. However, many states consider retirement accounts as countable assets regardless of their payout status. Given these state-specific variations, it's essential to understand your state's particular rules when planning for Medicaid eligibility.

Retirement accounts should not be transferred to a MAPT to avoid triggering immediate income tax consequences; such a transfer would be treated as a complete withdrawal. However, these accounts may receive some protection through careful planning.

Retirement accounts with properly designated beneficiaries may avoid estate recovery in states where assets that pass by beneficiary designation and avoid probate are exempt from estate recovery.

The decision to implement both a Medicaid Asset Protection Trust and a revocable living trust isn't about redundancy – it's about creating a comprehensive estate plan that protects your assets while maintaining necessary control. These trusts work together like a well-orchestrated symphony, each playing its crucial part in securing your financial legacy.

By understanding how these trusts complement each other, you can make informed decisions about protecting your assets, providing for your future care needs, and ensuring your legacy passes smoothly to your chosen beneficiaries. The key is working with experienced professionals who can help you implement these powerful tools effectively. Take action now to evaluate whether this dual-trust strategy aligns with your estate planning goals. The sooner you begin, the more options you'll have for protecting your assets and securing your future.