Does a Trust Protect Your Assets From Medicaid? Not Always

A trust can protect your assets from Medicaid, but only if it is irrevocable, drafted so that no principal can ever come back to you, and funded more than five years before you apply for benefits. A revocable trust offers no protection at all. Federal law asks a single question about any trust: could any portion of its assets be paid back to you under any circumstance? If the answer is yes, Medicaid counts those assets as yours.¹

Revocable Trusts Protect Nothing

If you can change the terms, pull money out, or dissolve the trust at any time, Medicaid treats the entire balance as your available resource. Any payments the trust makes to you count as income, and any payments it makes to others count as asset transfers that trigger penalties.¹ For Medicaid purposes, a revocable living trust is no different from a checking account with your name on it.

What Makes an Irrevocable Trust Actually Work

The federal statute says that if there are any circumstances under which a payment from the trust could reach you or be made for your benefit, that portion stays a countable resource. Only the portions where no payment could ever reach you under any scenario are excluded.¹ That single sentence controls the whole strategy.

In practice, a Medicaid Asset Protection Trust has to be drafted so the trustee has no authority to distribute principal back to you. Even theoretical discretion is enough for Medicaid to count the assets. The trust terms must make it legally impossible for the money to come home.

Income Is Treated Separately From Principal

Some irrevocable trusts let the grantor receive the income generated by the assets — interest, dividends, rent — while locking away the principal. Federal law treats those two streams separately. Income that could be paid to you remains countable and will be applied toward the cost of your care, but the principal stays protected for your beneficiaries.¹ Receiving trust income won’t disqualify you on its own.

Don’t Serve as Your Own Trustee

Neither you nor your spouse should be the trustee. Naming either of you creates an argument that you kept control, which defeats the point of the trust. Most families name an adult child, another trusted relative, or a professional fiduciary. The trustee manages the assets and makes distributions only to the named beneficiaries, never back to you.

The Five-Year Look-Back Period

A perfectly drafted trust won’t save you if you fund it too close to needing care. When you apply for Medicaid nursing home coverage, the state reviews every financial transaction from the prior 60 months. Any assets transferred for less than fair market value during that window, including transfers into a trust, trigger a penalty period of ineligibility.¹

How the Penalty Is Calculated

The penalty period equals the value of the transferred assets divided by the average monthly cost of private nursing home care in your state at the time you apply.¹ The national median for a private room currently runs about $10,800 per month. Transfer $108,000 into a trust within the look-back window and you face roughly ten months of ineligibility, during which you pay for care yourself.

When the Penalty Clock Starts

This is where planning goes wrong. The penalty period does not begin when you move the assets into the trust. It begins on the later of the transfer date or the date you would otherwise be eligible for Medicaid and receiving institutional care but for the penalty.¹ The clock does not run while you are healthy at home. It starts the moment you actually need care and apply.

Transfer assets three years before entering a nursing home, and the penalty period starts running when you apply, leaving you without coverage at the worst possible time. Complete the transfer more than 60 months before applying, and the look-back finds nothing. The assets in the trust are fully protected. That is why the five-year horizon is the whole game.

Transfers That Escape the Penalty

Federal law exempts several transfers from the penalty even when they happen inside the 60-month window. These apply in every state, though documentation standards vary.

Transfers to your spouse, or to another person for your spouse’s sole benefit, of any asset including the home.¹
Transfer of your home to a child under 21 or to a child of any age who is blind or permanently disabled.
Transfer of your home to a sibling who already has an ownership interest and lived there for at least one year immediately before you entered a nursing facility.
Transfer of your home to a child who lived there for at least two years before your institutionalization and provided care that delayed your need for a nursing facility.
Transfer of assets to a trust established solely for the benefit of a disabled person under age 65.

The caregiver child exception is often attempted and often denied. The adult child has to prove continuous residence for two full years before the parent entered a facility and care substantial enough to keep the parent out of a nursing home during that period. Occasional visits or part-time help will not qualify.

What Belongs in the Trust

A Medicaid Asset Protection Trust can hold most types of property that would otherwise count against you: real estate including your primary residence, bank account balances, certificates of deposit, and investment portfolios. Moving the primary residence in is often the highest-value step because the home is usually the largest single asset. The trust can be drafted so you keep the right to live there.

Retirement Accounts Are Different

IRAs and 401(k) accounts create a tax problem when you try to move them into an irrevocable trust. Pulling money out of a tax-deferred account to fund the trust triggers income tax on the full distribution. For a large IRA, that tax bill can erase much of the protection the trust would provide. Retirement accounts are usually handled through other Medicaid planning strategies rather than transferred in.

Estate Recovery After You Die

Protection during your lifetime is only half the picture. After a Medicaid recipient dies, federal law requires every state to seek reimbursement for nursing home services, home and community-based services, and related hospital and prescription drug costs paid on behalf of anyone who was 55 or older at the time.¹ States cannot pursue recovery while a surviving spouse is alive, or while a surviving child is under 21, blind, or disabled.² Once those protections lift, the state comes collecting.

At minimum, states must recover from probate assets — property titled solely in the deceased person’s name. Assets inside an irrevocable trust are legally owned by the trust, not the individual, so they bypass probate and sit outside the basic recovery reach.³

Some states use an expanded definition of “estate” that goes further. Under an expanded definition, states may pursue property held in joint tenancy, life estates, living trusts, annuity remainder payments, and life insurance payouts.⁴ In those states, the trust’s specific terms and the state’s specific rules both matter, which is why the answer to “will my trust survive estate recovery” depends on where you live.

The Capital Gains Trade-Off

Moving assets into an irrevocable trust creates a tax consequence that surprises many families. When someone dies owning an appreciated asset, their heirs normally get a step-up in basis: the cost basis resets to fair market value at the date of death, erasing years of accumulated capital gains. A family that inherits a home bought for $100,000 and worth $450,000 can sell it without owing tax on the $350,000 gain.

The IRS confirmed in Revenue Ruling 2023-2 that assets transferred to an irrevocable grantor trust do not receive this step-up when the grantor dies.⁵ The assets never re-enter the taxable estate, so the step-up rule does not apply. Beneficiaries who inherit the same home through the trust and sell it for $450,000 owe capital gains tax on the full $350,000 of appreciation.

This does not make trust planning a bad choice. Nursing home costs easily exceeding $10,000 a month usually dwarf the capital gains exposure. But the family should know the tax hit is coming. For a primary residence held in a grantor trust, the Section 121 exclusion of up to $250,000 in gain on a principal residence may still apply while the grantor is alive.⁶

Married Couples

Medicaid does not require a healthy spouse to go broke before the other qualifies for nursing home coverage. The community spouse keeps a protected share of the couple’s combined assets under the Community Spouse Resource Allowance, and assets in a properly funded irrevocable trust that has cleared the look-back are not counted when tallying those combined resources.⁷ The two protections stack: the community spouse keeps their allowance, and the trust shields additional assets on top.

Cost and When to Start

The single most important factor in Medicaid trust planning is time. Since no one can predict when a health crisis will hit, the earlier you fund the trust the better your odds of clearing the 60-month look-back. Waiting until a diagnosis is already in hand usually means it is too late to transfer assets without triggering penalties.

Attorney fees for drafting a Medicaid Asset Protection Trust typically run between $5,500 and $10,000 or more, depending on the complexity of your assets and your location. The fee usually includes retitling deeds and accounts into the trust. Given that a single year of nursing home care can exceed $130,000, the upfront legal expense pays for itself quickly if it keeps even a portion of your assets out of Medicaid’s reach. An elder law attorney familiar with your state’s Medicaid program can help fit the trust to the look-back exceptions, spousal rules, and estate recovery definition that will actually apply to your case.

1
Office of the Law Revision Counsel. 42 U.S. Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
2
Centers for Medicare & Medicaid Services. Estate Recovery
3
U.S. Department of Health and Human Services. Medicaid Estate Recovery
4
U.S. Department of Health and Human Services. Medicaid Estate Recovery Collections
5
Internal Revenue Service. Internal Revenue Bulletin 2023-16
6
eCFR. 26 CFR 1.121-1 – Exclusion of Gain From Sale or Exchange of a Principal Residence
7
Centers for Medicare & Medicaid Services. 2026 SSI and Spousal Impoverishment Standards