The Medicaid Asset Protection Trust (MAPT) is an irrevocable trust used for Medicaid planning or asset protection purposes. After assets are funded into the trust and the look-back period has expired, the assets in the trust are non-countable for long-term care Medicaid eligibility. The MAPT has several aspects that result in tax advantages, such as being a grantor trust and having trust income taxed according to the Grantor’s income tax brackets instead of trust taxation rates. Other tax advantages that the MAPT can be designed with stem from retaining a limited power of appointment (LPOA). Let’s take a deeper dive into the LPOA.
A Grantor can retain an LPOA when drafting a trust. The Grantor is both the donor and donee of the LPOA in that situation, but for purposes of this article, let’s refer to that Grantor as the powerholder of the LPOA. When retaining an LPOA, the powerholder retains the power to appoint trust assets to certain people, called permissible appointees. Since the LPOA in the MAPT is a limited power of appointment, permissible appointees must exclude the powerholder, his estate, his creditors, or the creditors of his estate. The LPOA in the MAPT is also a testamentary power, meaning any appointment thereof is effective at the death of the powerholder.
While the literal power of the LPOA is to be able to change the ultimate beneficiaries of trust assets by exercising the LPOA in favor of permissible appointees, retaining an LPOA has other consequences as well. Retaining an LPOA in the MAPT will cause estate inclusion under IRC 2038(a)(1). This means that trust assets will be included in the Grantor’s estate for estate tax purposes. Since the current gift and estate tax exemption amount is so high ($12.92 million per individual for 2023), most Grantors don’t mind if trust assets are included in their estate because this also results in another tax benefit.
Assets included in a Grantor’s estate are afforded an adjusted basis under IRC 1014(b)(9). A basis adjustment is oftentimes referred to as a step-up in basis, but remember that there’s always the possibility that assets have depreciated and thus would incur a step-down. However, most of the time it is the case that assets will receive the step-up, which means that the asset's tax basis is the asset's fair market value at the time of the step-up and not the asset's value at the time of purchase. The result is a decrease in capital gains tax due when the property is sold.
The MAPT is a powerful tool offered by Elder Docx, WealthCounsel’s state-of-the-art document drafting software program. Elder Docx also offers many other trusts and ancillary documents that aid elder law attorneys in their practice of Medicaid planning, Veterans pension benefits planning, and special needs planning. Contact us today for a preview of the Medicaid Asset Protection Trust and to see Elder Docx in action.