Medicaid Asset Protection Trust

A Medicaid asset protection trust is an irrevocable trust that a person funds with their own assets, under terms that bar the trustee from paying any of the principal to that person or for their benefit. The aim is eligibility for Medicaid's long-term-care coverage while preserving the principal for the trust's other beneficiaries, usually family. The name is a planning term, not a legal one: the governing statute, 42 U.S.C. 1396p(d)(3)(B), speaks only of "an irrevocable trust," and the trust works, if it works, because of how that provision treats a trust from which "no payment could under any circumstances be made to the individual." The most familiar version is also called an irrevocable income-only trust, because income may be paid to the person who created it and principal may not.

The federal rule splits an irrevocable trust in two. Under 42 U.S.C. 1396p(d)(3)(B)(i), "if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual," the part of the principal or income that could be paid to them "shall be considered resources available to the individual." Under (d)(3)(B)(ii), any portion from which "no payment could under any circumstances be made to the individual" is treated, as of the date the trust was established or, if later, the date payment to them was foreclosed, as "assets disposed by the individual" for the transfer-penalty rules in subsection (c). So the trust does not make money invisible. It converts a countable resource into a past transfer, and the transfer is what the look-back examines.

"Any circumstances" is read literally, and the statute closes the obvious workarounds. Subsection (d)(2)(C) applies the rule "without regard to" the purposes for which the trust was set up, whether the trustees have or exercise discretion, and any restrictions on when, whether or how distributions may be made. A clause letting a trustee pay principal to the person "only in an emergency" is therefore still a circumstance under which payment could be made, and the principal subject to it counts. The rule also reaches trusts set up by a spouse, by someone with legal authority to act for either spouse, or by someone acting at their request, under (d)(2)(A), so long as the person's assets funded it and it was created "other than by will". A revocable trust never qualifies: under (d)(3)(A) its whole principal is a resource.

The 60-month look-back runs from the funding. For a trust portion treated as disposed of under (d)(3)(B)(ii), 42 U.S.C. 1396p(c)(1)(B)(i) sets the look-back date 60 months before the application date. A transfer inside that window produces a period of ineligibility for nursing-facility and similar care, calculated by the state, rather than being ignored. States implement the details in their own rules: Ohio's, for instance, calls the penalty a "restricted medicaid coverage period," dates the transfer from the trust's establishment or the date payment to the individual was prohibited, whichever is later, and treats every later addition of assets to the trust as a separate transfer with its own date.

What the person gives up, and what still counts. The person who creates the trust cannot revoke it or take back principal, which is the point and the cost. Income the trust may pay them is not protected: under (d)(3)(B)(i), payments of that income to them "shall be considered income of the individual." The New York State Bar Association article that describes the design notes that such trusts are often written as grantor trusts, so the income is taxed on the creator's own return. That is an income-tax choice and does not decide the Medicaid question either way.

Three neighboring questions it does not settle. Estate recovery is one: 42 U.S.C. 1396p(b)(4)(B) lets a state define the estate it recovers from to include assets in which the person "had any legal title or interest at the time of death," including through a living trust or "other arrangement," so what a given state can reach depends on its definition and on what interest the person kept. The home is another, because Medicaid has its own home rules, including a lien on the home of some permanently institutionalized recipients. The third is the set of trusts Congress exempted outright in subsection (d)(4), such as the disability payback trust and the pooled trust, which work on different terms and are a different planning tool. Federal law also requires each state to have an undue-hardship waiver procedure under (d)(5).

The person who wants protection signs an irrevocable trust naming a trustee other than themselves and transfers assets into it, such as an investment account or, subject to the state's home rules, real estate. The trust's terms allow income, or nothing at all, to be paid to them and forbid any payment of principal to them or for their benefit. From the funding date, the principal is no longer their resource, and the funding is a transfer for less than fair market value with a date attached.

Take an example with invented figures. Odalys, 72, moves a $300,000 brokerage account into such a trust on March 1, 2026. The trust pays her the account's income, about $9,000 a year, and can pay principal only to her two children. Two outcomes follow from the dates alone. If she applies for nursing-home Medicaid after March 1, 2031, the funding sits outside the 60-month look-back and the $300,000 is neither a resource nor a reviewable transfer, though the $9,000 of income still counts as hers. If instead she needs care and applies in 2029, the transfer falls inside the window and the state computes a period of ineligibility from it, during which the trust's principal cannot be paid back to her to cover the bill. Had the trust allowed even an emergency distribution of principal to her, the whole $300,000 would have counted as her resource from the start.

Pros

• Principal in a trust that can never pay the creator is not a countable resource for Medicaid under federal law, and once the funding is more than 60 months old it is outside the transfer look-back as well.
• Assets preserved in the trust can pass to the named beneficiaries under the trust's terms rather than being spent on care.
• The design can keep paying income to the creator, so it need not cut off their cash flow entirely.

Cons

• It is irrevocable: the creator gives up the right to take back principal, even if their circumstances or family relationships change.
• It only works with time. A need for care within 60 months of funding brings a penalty period, and the protected money cannot be paid back to cover it.
• The rules are heavily state-specific, and estate recovery, the home and the tax design each turn on further rules, so a trust that is sound in one state can be weaker in another.
• A single drafting flaw that leaves any path for principal to reach the creator makes that principal countable.