Most people spend years working, saving money, and building financial security. They often expect those savings to support them in retirement and help their families in the future. One unexpected illness or injury can change those plans. A person who develops Alzheimer’s disease, has a stroke, or faces another serious medical problem may later need help with activities of daily living like bathing, dressing, eating, taking medicine, or moving safely around the home.
This kind of help is called long-term care. Unlike medical treatment, long-term care focuses on helping a person do daily tasks over a long period of time. It can be provided at home, in assisted living, or in a nursing facility. No matter where care is given, the cost can be very high. Planning before a crisis happens can provide more choices and may help protect important assets.
Many people think Medicare or private health insurance will pay for all future health care costs. In reality, these programs usually do not cover most long-term care. Medicaid is the main government program that helps pay for long-term care for people who meet certain medical and financial rules. To qualify, a person usually must meet limits on both income and assets. Income is money a person gets on a regular basis, like Social Security or a pension. Assets are things a person owns, like savings, investments, or property.
Louisiana Medicaid
In Louisiana, Medicaid only pays for long-term care that is provided in a nursing facility or, in certain circumstances, at home through Medicaid’s Home and Community Based Services Waiver (“HCBS”) program. Louisiana Medicaid does not pay for assisted living care and the waiting list to receive HCBS home care may be very long.
One of the foundational principles of Medicaid is a five-year lookback rule. Before approving an application for Medicaid long-term care benefits, Medicaid examines certain financial transactions made during the sixty months immediately preceding the application date. The purpose of this review is to determine whether assets were transferred for less than fair market value in an effort to qualify for Medicaid by artificially reducing countable resources.
Five-Year Lookback
If Medicaid determines that an applicant transferred assets during the five-year lookback period without receiving fair market value in return, the transfer may trigger a penalty period. During this period, the applicant is ineligible to receive Medicaid long-term care benefits despite otherwise meeting the program’s financial and medical eligibility requirements.
The length of the penalty period is generally determined by dividing the value of the transferred assets by the state’s Medicaid penalty divisor, which represents the average monthly cost of nursing home care. For example, if an individual transfers $72,000.00 in assets and applies for Medicaid, the state would divide the transferred amount by its $7,200 monthly penalty divisor, equaling 10. The individual would then face a 10-month penalty period during which Medicaid would not pay for long-term care services, assuming all other eligibility requirements are met. During this penalty period, the applicant is required to privately pay for long-term care services during the period of ineligibility.
MAPTs
Medicaid Asset Protection Trusts, or MAPTs, are one planning tool that may help protect certain assets while a person prepares for possible future Medicaid long-term care benefits. It is not the right choice for everyone, and it works best when it is created well before nursing home care is needed.
A MAPT is a type of “irrevocable trust” designed to move certain assets out of a person’s direct ownership. The purpose of the trust is to start the five-year Medicaid lookback period. The person creating the trust, called the “Grantor” (a “Settlor” in Louisiana) transfers assets to the “Trustee” who manages the assets according to the terms that were established by the Grantor when creating the trust. When Medicaid reviews eligibility, it looks at what a person owns. Assets held in the trust may not be counted in the same way as assets the person still owns directly. Timing is critical for MAPTs to work properly.
While a MAPT is designed to protect assets from counting for Medicaid eligibility purposes, since transfers to the trust are still subject to the five-year lookback period, funding aa MAPT does not produce immediate Medicaid eligibility. Instead, as mentioned above, the transfer begins the running of the five-year Medicaid lookback period.
In some cases, people use a MAPT to help protect savings, investments, or a home. A home can be especially important because many families want to preserve it for a spouse or children. But if a house has a mortgage, the trust must be handled carefully. A house with a mortgage cannot be placed into an irrevocable trust without the lender’s written consent. If it is transferred without permission, the lender may have the right to demand immediate payment of the full loan balance. For that reason, families often need to pay off the mortgage first or get the lender’s approval before moving the home into the trust.
Many people have a majority of their assets in their 401(k)s or IRAs. These retirement plan assets cannot be transferred directly to MAPTs. Instead, the Grantor would have to withdraw the assets from the retirement plan, pay the taxes and put the remainder of the assets into MAPTs. Most people do not want to pay taxes unnecessarily so careful consideration and appropriate tax advice should precede the cashing of retirement plan assets to put in a trust. There may also be other asset transfers that could have unintended tax consequences so it’s a good idea to have your CPA involved in giving tax advice about transfers to MAPTs.
For individuals with substantial assets that would otherwise be subject to Medicaid spend-down requirements, a properly structured and timely funded MAPT may preserve wealth while facilitating future Medicaid eligibility. By contrast, individuals with relatively modest assets may realize fewer benefits from transferring property into an irrevocable trust, particularly if doing so unnecessarily restricts access to resources that may be needed during their lifetime. Accordingly, the costs, restrictions, and administrative requirements associated with MAPTs should be evaluated in light of the individual’s overall financial circumstances, anticipated long-term care needs, and estate planning objectives.
Long-term care planning is about more than protecting assets. It is about keeping choices open and preparing for future care needs before a crisis occurs. MAPTs can be a useful planning tool for some people and families when it is created early and used correctly. However, every family’s finances, health, and goals are different, so there is no single plan that works for everyone. Understanding how MAPTs works and getting qualified legal and professional advice are important first steps toward making informed choices about paying for long-term care.
The information provided is not intended to be legal or tax advice and does not constitute any attorney/client relationship. You should consult with an attorney for individual advice regarding your own situation.
Ms. Melancon is an attorney with Legacy Estate & Elder Law of Louisiana, LLC with offices in Baton Rouge, New Orleans, and Lake Charles, LA. The primary focus of her practice is estate planning, probate, special needs planning, and elder law. For more information or to attend an upcoming estate planning seminar, call her office at (225) 399-7073.
