Using Trusts to Protect Family Wealth from Future Healthcare Costs

The cost of long-term care is rising fast—and for many families, it's becoming one of the biggest threats to generational wealth. In 2024, the national median annual cost for a private nursing home room was $108,405, according to Genworth’s Cost of Care Survey, and that number is expected to increase significantly over the next two decades due to inflation and labor shortages in the healthcare industry. That kind of expense can quickly drain retirement savings, real estate equity, and the legacy many parents hope to leave behind.

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But there are ways to prepare. One popular strategy is a Medicaid Asset Protection Trust (MAPT). When structured properly—and early enough—these trusts allow families to protect assets while still qualifying for Medicaid to help cover future care costs.

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This is one of the few strategies that lets you both protect what you’ve worked hard for and still get the care you need. But it’s not something you can wait to figure out later.

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What Is a Medicaid Asset Protection Trust—and How Does It Work?

A Medicaid Asset Protection Trust (MAPT) is an irrevocable trust designed to help individuals qualify for Medicaid by legally removing certain assets from their name. Once placed in the trust, those assets are no longer considered “countable” under Medicaid eligibility rules.

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Here’s how it works:

• Irrevocable Structure: Once the trust is created, it cannot be easily changed or dissolved. That’s part of what gives it legal protection.
  
  
• Lookback Period: Any assets transferred into a MAPT must be done at least five years before applying for Medicaid. Otherwise, the government can impose a penalty period during which you’re ineligible for assistance.
  
  
• Trustee Appointment: The trust is controlled by a trustee—usually an adult child or another trusted individual—not the person who created it.
  
  
• Use of Income: The grantor can receive income generated by the trust (such as dividends), but cannot touch the principal once it's transferred.
  
  

Think of it as a vault you can’t open, but your family can benefit from in the future. If you set it up at least five years before needing care, Medicaid won’t count those assets against you.

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What Can Be Protected in a Trust?

Not all assets are treated equally when it comes to Medicaid eligibility, and that’s where a MAPT becomes a powerful tool. The goal is to legally move certain assets out of your name so they are no longer “countable” under Medicaid rules. This preserves your family’s financial legacy while helping you qualify for care.

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Primary Residence

Your home is often your most valuable asset—and one of the easiest to protect. You can transfer your home to the trust and still retain the right to live there for the rest of your life. This is known as a life estate. It allows you to keep full use of the home while protecting it from Medicaid estate recovery.

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Non-Retirement Investment Accounts

Brokerage accounts, CDs, and other non-retirement investments can be transferred into the trust. While you can no longer access the principal directly, you may be able to receive income from the assets generated. This structure allows you to maintain some financial benefits while removing assets from your Medicaid profile.

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Life Insurance with Cash Value

Permanent life insurance policies with accumulated cash value are considered countable assets under Medicaid. If left untouched, they can disqualify you from coverage. But if transferred into the trust, the cash value is removed from your personal estate while preserving the death benefit for your heirs.

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Vacation Homes and Rental Properties

Additional real estate, such as vacation cabins or income-generating properties, can also be transferred into the trust. As long as this is done well in advance of a Medicaid application, the equity in these properties can be shielded from being spent down on care.

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What Can’t Be Transferred?

Qualified retirement accounts like IRAs and 401(k)s generally cannot be moved directly into a MAPT without triggering income tax consequences and potentially incurring early withdrawal penalties. These accounts are considered personal assets and must remain in your name while you're alive.

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That said, there are ways to reduce Medicaid exposure while still managing these accounts strategically:

• Roth conversions: By converting traditional IRA funds to a Roth IRA while in a lower tax bracket, you can reduce future required minimum distributions (RMDs) that count toward Medicaid income thresholds.
• Systematic withdrawals: Carefully managed distributions can reduce the size of a retirement account over time, minimizing what is exposed to spend-down requirements.
• QLACs (Qualified Longevity Annuity Contracts): These can be used to defer RMDs from a portion of your IRA, potentially lowering your reportable income for Medicaid eligibility purposes.

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Because these strategies intersect with tax law and Medicaid policy, they should be coordinated with both a financial advisor and an elder law attorney.

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Tax and Estate Benefits of Medicaid Asset Protection Trusts

Trusts do more than protect against long-term care costs—they can improve how your estate is handled after death.

• Avoid Probate: Assets in the trust pass directly to your beneficiaries, reducing delays and costs associated with probate court.
  
  
• Step-Up in Basis: Upon death, most assets in the trust receive a step-up in cost basis. This can significantly reduce capital gains taxes for heirs who later sell the property.
  
  
• Maintain Property Tax Benefits: In Indiana and other states, homeowners may be able to retain tax deductions, such as the Homestead Exemption, even after transferring the home into the trust, if structured correctly.
  
  

Seniors using irrevocable trusts not only protect their assets from Medicaid but also ensure their heirs aren’t burdened with steep taxes.

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Common Mistakes Families Make with Asset Protection Trusts

A trust is only as strong as its structure and timing. Here are the most common missteps:

• Starting Too Late: Medicaid enforces a five-year “lookback” period. Transfers made within five years of an application can trigger penalties or disqualification.
  
  
• Naming the Wrong Trustee: Trustees manage the trust’s assets, so this must be someone trustworthy, responsible, and financially literate. Family conflict can arise if the wrong person is chosen.
  
  
• Using a DIY Approach: Medicaid rules vary by state, and MAPTs are complex legal tools. Relying on online forms or non-specialist advisors can lead to costly errors.
  
  

The National Council on Aging warns that poorly structured asset transfers can expose families to Medicaid estate recovery, effectively undoing years of careful planning.

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How to Know if This Strategy Is Right for You

Medicaid Asset Protection Trusts are especially well-suited for middle-income families with a home, savings, and a desire to preserve assets for the next generation. You might benefit from a MAPT if:

• You’re 60 or older and starting to plan for future care.
  
  
• You have a home or other assets you want to pass on to children or grandchildren.
  
  
• You’re healthy now, but want to prepare for possible nursing home care without sacrificing your entire estate.
  
  

If you wait until a health crisis occurs, your planning options may be limited. But if you act now, you can build a structure that protects your assets while ensuring access to care when it’s needed.

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Know Your State Eligibility

​​Medicaid eligibility and asset protection rules vary by state, and not all strategies apply uniformly across jurisdictions. For example, Indiana allows for the continued application of property tax exemptions like the Homestead Deduction when a home is placed into a properly structured MAPT, but not all states offer this benefit.

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This means the timing, structure, and type of assets transferred into a trust must be tailored to your state’s Medicaid guidelines. Consulting with an elder law professional who understands your local regulations is critical to ensure the trust holds up under scrutiny.

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Conclusion

Rising healthcare costs don’t have to erase a lifetime of financial progress. Medicaid Asset Protection Trusts offer a powerful—and entirely legal—way to shield your home, investments, and family wealth from the high price of long-term care.

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The key is to start early, get good guidance, and build a plan that aligns with your personal goals and your state’s rules. With the right structure in place, you can protect your legacy, preserve your options, and provide peace of mind for your loved ones.

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To explore how a trust can help protect your family’s assets from long-term care costs,
email Terry@DuPontAdvisory.com, call (800) 234-4452, or schedule a discovery call.

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Sources

Fidelity
AARP

MedicaidPlanningAssistance.org

Investopedia

National Council on Aging

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