A Medicaid Asset Protection Trust is an irrevocable trust that holds your assets so they no longer count toward Medicaid’s strict eligibility limits for long-term care. In most states, you can qualify for Medicaid nursing home coverage only if your countable assets total $2,000 or less. Transfer property, savings, or investments into a properly drafted trust at least five years before you need care, and those assets become invisible to Medicaid’s financial screening. The trade-off is permanent: whatever goes into the trust is no longer yours to control.
How the Trust Works
The trust must be irrevocable. Once you sign it and move assets in, you cannot undo it, rewrite the terms, or pull assets back out. That permanent loss of control is the entire point. Under federal law, anything in a revocable trust is treated as a resource available to you, which means it counts against the $2,000 asset limit.1Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets An irrevocable trust flips this: any portion from which you cannot receive payments under any circumstances is treated as no longer yours.
Three roles make the trust function. The grantor is you, the person who creates the trust and transfers assets in. The trustee is the person or institution that manages those assets going forward. Neither you nor your spouse can serve as trustee, because Medicaid could argue you still control the assets. The beneficiaries, usually your children or other family, are the people who inherit the trust property after your death.
Income Versus Principal
The critical distinction inside the trust is between income and principal. The document can be written to let you receive income the assets generate, such as interest, dividends, or rental payments. You are completely barred from touching the principal, meaning the underlying value of the assets themselves. That separation is what keeps the principal off Medicaid’s radar. If the trust allowed you any access to principal, that portion would be countable as an available resource under federal law.1Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Income you do receive still counts toward Medicaid’s income test.
The Five-Year Look-Back
Medicaid does not just check your current balance when you apply. It reviews the previous 60 months of financial history to find any assets transferred for less than fair market value.1Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Funding a trust counts as exactly that kind of transfer, because you are giving assets away and getting nothing back.
If Medicaid finds transfers inside that window, it does not fine you. It imposes a penalty period during which you are ineligible for benefits. The length is calculated by dividing the value of the transferred assets by the average monthly cost of a private nursing home in your state. Transfer $300,000 in a state where private-pay runs $10,000 a month, and the penalty is 30 months. During those months you pay out of pocket.
The penalty period generally starts when you apply for Medicaid and are found ineligible because of the transfer, not on the date of the transfer itself. This catches people who assume they can start the clock by moving assets and then wait to apply. Fund a trust and apply four years later, and the transfer is still inside the window; the penalty runs from your application date forward.
The practical takeaway: the trust must be established and funded well before a health crisis. Waiting until a diagnosis or a fall and then rushing to set one up is almost always too late. Planning five or more years ahead is the only reliable way to clear the look-back.
What You Can Put In (and What You Can’t)
The most common asset placed in the trust is the family home. Transferring it lets you keep living there while removing it from Medicaid’s count. This matters more than people realize because while Medicaid exempts a primary residence during your lifetime (up to a home equity limit of $752,000 to $1,130,000 depending on the state), that exemption vanishes at death when estate recovery begins.2Centers for Medicare and Medicaid Services. 2026 SSI and Spousal Impoverishment Standards The trust sidesteps this by ensuring the home was never part of your estate.
Beyond the home, people commonly move savings accounts, brokerage and investment accounts, vacation properties, and other real estate. Essentially, any asset you own outright can go in.
Retirement accounts are the major exception. You generally cannot transfer a 401(k) or IRA into the trust without triggering a full taxable distribution. Cashing out a retirement account to fund a trust creates an immediate income tax hit that often outweighs the Medicaid benefit. How these accounts are treated for Medicaid depends on payout status. If the account is in payout, many states count only the periodic withdrawals as income and ignore the balance. If it is not, the whole balance may count. Rules vary by state, so retirement accounts need separate analysis from an attorney or tax advisor.
What It Costs
Attorney fees for drafting and funding the trust typically run from $2,000 to $12,000, depending on the complexity of your assets, your state, and whether the attorney is also handling broader estate planning. The trust may also require retitling deeds, updating beneficiary designations, and transferring financial accounts, each of which can involve its own fees. If you use a professional or corporate trustee, expect ongoing annual fees on top. Compared to a single year of nursing home care, setup costs are modest. For someone trying to preserve limited savings, they are not trivial.
The Tax Trade-Offs
The trust shields assets from Medicaid, but it creates tax consequences worth understanding before you sign anything.
Income Taxes
Most of these trusts are structured as grantor trusts for income tax purposes, meaning all income and capital gains generated inside the trust are reported on your personal return. The trust itself does not file separately in most cases. This is generally favorable, because individual tax rates are often lower than trust rates, which hit the top bracket at relatively modest income levels.
Gift Tax
Transferring assets into an irrevocable trust is treated as a gift for federal tax purposes. You can give up to $19,000 per recipient per year without triggering a gift tax return.3Internal Revenue Service. Gifts and Inheritances Transfers above that amount do not necessarily create tax either, because they reduce your lifetime exemption, which for 2026 is $15,000,000.4Internal Revenue Service. Whats New – Estate and Gift Tax For most people funding this kind of trust, the gift tax filing is paperwork, not a bill.
The Lost Step-Up in Basis
This is where the tax math gets uncomfortable. Normally, when you die owning appreciated property, your heirs receive a stepped-up basis equal to the property’s fair market value at death. Buy a house for $150,000, die when it is worth $500,000, and your children inherit it at the $500,000 basis with no capital gains tax if they sell. The IRS has ruled that assets held in an irrevocable grantor trust do not qualify for this step-up because they are not included in the grantor’s taxable estate.5Internal Revenue Service. Revenue Ruling 2023-2 Your heirs inherit at your original cost basis. In the example above, they would face capital gains tax on $350,000 of appreciation if they sold.
For a family home the children plan to keep, this may not matter. For investment accounts or property likely to be sold, the lost step-up can represent a substantial tax cost that partially offsets the Medicaid savings. Run the math with a tax professional before funding.
Protection From Estate Recovery
Even if you qualify for Medicaid and receive years of care, the story does not end at death. Federal law requires every state to seek repayment from your estate for Medicaid benefits received after age 55, including nursing facility services and home-based care.1Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets This is the Medicaid Estate Recovery Program.
Estate recovery targets assets that pass through your estate at death. The federal definition of estate is broad, and states can expand it beyond probate to include property held in joint tenancy, life estates, living trusts, and other arrangements.1Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Assets inside a properly structured Medicaid Asset Protection Trust are not part of your estate. You gave up ownership years earlier, and the beneficiaries own those assets, not your estate. That is a significant piece of what the trust does, and it is easy to overlook when the focus is on qualifying for benefits.
If You’re Married
When one spouse needs nursing home care and the other stays at home, Medicaid does not require the at-home spouse to become destitute. Federal law provides a Community Spouse Resource Allowance that lets the at-home spouse keep a portion of the couple’s combined assets. For 2026, the maximum is approximately $162,660. The at-home spouse also receives a Monthly Maintenance Needs Allowance for living expenses.
A trust can complement these protections by sheltering assets above the resource allowance. Without one, any couple’s assets exceeding the allowance must be spent down before the nursing home spouse qualifies. With a trust funded outside the look-back window, those excess assets are already off the table. Remember that the at-home spouse cannot serve as trustee, and any income the trust pays to the grantor-spouse still counts for Medicaid income calculations.
Mistakes That Void the Protection
The most frequent error is waiting too long. People tend to think about Medicaid planning only after a health scare, and by then the look-back window makes the trust ineffective.
The second most common mistake is drafting the trust in a way that gives the grantor any access to principal, however indirect. If there is any circumstance under which the trust could pay principal to you, Medicaid treats that portion as your asset.1Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
Other pitfalls include naming yourself or your spouse as trustee, failing to actually retitle assets into the trust after the documents are signed, and ignoring the tax cost of the lost step-up. Each can either disqualify the trust’s Medicaid protection entirely or create unexpected costs that erode the benefits. This is one of the few legal tools where getting 90% of the details right still means it fails, which is why it is not a do-it-yourself project.