Your parents are in their early 70s and healthy. They own their home and have some savings, and they've watched friends spend everything on nursing home care before Medicaid would help. They've heard about a trust that could protect the house for you and your siblings. Is it real, and is it right for them?
This guide explains the federal rules in 42 U.S.C. 1396p that govern how Medicaid treats trusts. It's general information, not legal advice. These trusts are complex and must be drafted for your parents' state.
How a Medicaid asset protection trust works
Your parent, the grantor, creates an irrevocable trust and transfers assets into it, often the home and some savings. Someone else, usually an adult child, serves as trustee. The trust says that the principal can never be paid to your parent or their spouse. It may allow income, like interest, to be paid to your parent, and it may let your parent keep living in the home. When your parent dies, what's left goes to the beneficiaries named in the trust, usually the children.
Because your parent no longer owns or can reach the principal, Medicaid doesn't count it as their resource, once the look-back period has passed. That's the whole idea.
What federal law says about trusts
Federal Medicaid law treats trusts this way1:
- Revocable trusts are fully counted. The whole trust is treated as available to your parent. A revocable living trust offers no Medicaid protection. See living trusts vs. wills.
- In an irrevocable trust, anything that could be paid to your parent counts. If, under any circumstances, the trustee could pay principal or income to your parent, that portion is treated as available.
- Any part that can never be paid to your parent is treated as a transfer of assets. The date of transfer is when the trust was set up or, if later, when payment to your parent was ruled out.
- Transfers into trusts face a 60-month look-back. If your parent applies for Medicaid long-term care within five years of the transfer, a penalty period may apply. See the Medicaid look-back period.
- Income paid to your parent counts as income. If the trust pays out interest or dividends to your parent, that income counts toward Medicaid's income rules.
The 60-month look-back and penalty
When your parent applies for Medicaid nursing home or waiver coverage, the state looks back five years for transfers made for less than fair value, including transfers into an irrevocable trust1. If there's a transfer in that window, the state calculates a penalty period during which Medicaid won't pay for long-term care. The penalty generally starts when your parent is otherwise eligible, meaning they've already spent down other assets1. That can leave a family with no way to pay for care during the penalty.
So the planning rule of thumb is simple: a trust works only if your parent can pay for any care they need, from other money, for five years after funding it. If a nursing home is likely sooner, other strategies may fit better. See Medicaid spend-down.
What your parent gives up
- Control. Your parent can't take the money back or sell the house and keep the proceeds.
- Flexibility. If your parent's needs change, the money in the trust can't be used for their care.
- Trust in the trustee. The trustee has legal control. The CFPB's guide for trustees describes the duty to manage the trust in the beneficiaries' interest and keep records2. Choose carefully.
- Tax considerations. How the trust is drafted affects income tax, capital gains on the home, and property tax exemptions. Ask the attorney to explain them.
- Setup and upkeep. Legal costs, retitling, and possibly yearly tax filings for the trust.
Trusts Medicaid treats differently
Federal law carves out a few trusts that work differently1. These aren't asset protection trusts in the usual sense, but families often hear about them:
- Special needs trusts for a person with a disability under age 65, paid back to Medicaid at death.
- Income trusts, sometimes called Miller trusts, used in some states for people with income above the Medicaid limit.
- Pooled trusts managed by nonprofits for people with disabilities.
Transfers to a spouse, and in some cases to a disabled child or a caregiver child who lived in the home, may also be exempt from penalties1. Ask an attorney whether any of these apply before setting up a trust. If your parent's estate will face Medicaid recovery, see Medicaid estate recovery and whether a nursing home can take the house.
When a trust might make sense
- Your parent is healthy, with no likely need for long-term care in the next five years.
- There are other resources to pay for care and living expenses during the look-back.
- Your parent wants to leave the home or savings to family and accepts giving up control.
- The family trusts the trustee and gets along well enough to cooperate.
It's usually a poor fit when care is already needed, when your parent needs the money to live on, or when family conflict is likely. Long-term care insurance may be another way to plan.
Risks and mistakes
- Waiting too long. Funding a trust two years before a nursing home stay can create a penalty.
- Drafting errors. Language that lets the trustee pay principal to your parent can make the whole trust countable1.
- Treating it like your parent's account. Paying your parent's bills from trust principal can undo the protection.
- One-size-fits-all packages. Trusts sold at seminars may not follow your state's rules.
- Forgetting the other spouse. Planning must account for both spouses.
Alternatives to an asset protection trust
A trust is one tool among several, and for many families it isn't the best one. If your parent is already close to needing care, an attorney may suggest spending savings on things that help your parent and are allowed under Medicaid rules, like paying off a mortgage, making the home safer, buying a prepaid funeral plan, or replacing an old car. Married couples have protections for the spouse who stays at home, which can shelter more than families expect. Some families use a written, paid caregiver agreement so a child who provides care is paid fairly, which is not a gift if it's done properly.
Others decide that protecting an inheritance isn't the priority. They'd rather keep savings available to pay for good care at home or in assisted living, where Medicaid coverage is more limited, and rely on Medicaid only if a long nursing home stay happens. That's a legitimate choice, and it keeps your parent in control of their own money.
What the trustee does
Being the trustee of an asset protection trust is a real job, often for many years. The trustee keeps trust money in a separate account in the trust's name, never mixes it with personal money, keeps records of every deposit and payment, and makes sure the trust files any required tax returns. If the home is in the trust, the trustee usually makes sure it's insured and property taxes are paid, according to the trust's terms. The trustee must follow the trust document exactly, which usually means refusing to hand principal to your parent even if asked. That can be emotionally hard. If your parent has dementia and asks for money, the trustee has to say no, while making sure their needs are met from other sources.
An example
Harold and June, both 72 and healthy, wanted to leave their paid-off home to their two children. Their elder law attorney set up an irrevocable trust with their daughter as trustee, transferred the house into it, and kept their savings and pensions outside the trust to cover their living costs. The trust let them keep living in the home. Six years later, June needed a nursing home. Because the transfer was outside the look-back, the house wasn't counted for her Medicaid application. This is an illustration; state rules and facts vary.
Talking with your parents about it
Asset protection trusts raise sensitive questions: is this for your parents' benefit or the children's inheritance? Be honest about that. The decision belongs to your parents, and the trust should leave them secure. Encourage them to meet the attorney on their own for part of the time, and to keep enough money outside the trust to live comfortably and pay for care at home. If siblings disagree, get it out in the open before the trust is signed. It also helps to put the family's understanding in writing: who the trustee is, how decisions about the house will be made, and what happens if a sibling needs to move in or the home needs repairs.
Finding the right attorney
These trusts should be drafted by a lawyer who regularly handles Medicaid planning in your parents' state. The National Academy of Elder Law Attorneys has a lawyer directory5, and Older Americans Act legal programs can help with Medicaid questions for many older adults6. See our guide to choosing an elder law attorney.
- How many of these trusts do you draft each year?
- How does our state treat trust income and the home?
- What happens if we need care within five years?
- What are the tax effects? Including capital gains on the home and property tax.
- What does the trustee have to do each year?
