- Grantor Can Retain Income
- Grantor Can Retain Limited Power of Appointment (LPOA)
- Grantor Can Retain Right to Change the Trustee
- Tax Consequences
- Coordinate MAPT with Other Planning Tools
Purpose of a MAPT
The purpose of a MAPT is to qualify for Medicaid while protecting your assets.
Qualify for Medicaid. The reason you might want to qualify for Medicaid is to so Medicaid can pay for your long-term care. Most people don’t have long-term care insurance. Medicare does not meaningfully cover long-term care.
Protect Assets. You use a MAPT to help you qualify for Medicaid so you can preserve some of your assets. Assets that are transferred to a MAPT should not1 count as an available resource for purposes of Medicaid eligibility.
A MAPT can protect some or all of the trust’s corpus, depending on when the transfer was made. If the transfer was made outside of the look back period, then the entire corpus may be protected. If the transfer is made within the look back period, then a portion of the corpus may be protected.
|Transfer made outside of look back period?||Entire corpus may be protected||Portion of corpus may be protected|
Can Be Self-Settled Trust
A self-settled trust is a trust in which the grantor retains a beneficial interest. A MAPT is typically drafted as a self-settled trust because the grantor retains the trust’s income or the right to live in a home that is transferred to the trust. But a MAPT must never allow the grantor (or the grantor’s spouse) to have a beneficial interest in the trust’s principal.
Grantor Can Retain Income
Gift Tax Exposure for Entire Interest Transferred
|Issue||Retained Income Interest||Remainder Interest|
|Subject to Gift Tax?||No||Yes|
|Value||Can be disregarded under IRC 2702||Can be equal to all trust assets under IRC 2702|
Under IRC 2702, the amount that is retained by the grantor is disregarded if a gift is made to successor beneficiaries who are members of the grantor’s family.
If the retained interest is disregarded under IRC 2702, then:
- The value of the entire interest that is transferred is subject to the gift tax.
- If the gift is greater than the annual exclusion, then a gift tax return must be filed reporting the value of the entire interest.
Estate Tax: Entire Trust Included in Gross Estate
The entire interest is included in the decedent’s gross estate for purposes of the federal estate tax. IRC 2036(a)(1).
So, the transfer could result in a taxable gift and in inclusion in the gross estate.
Income Tax Upon Grantor’s Death: Basis Step-Up
Upon the grantor’s death all of the trust’s assets receive a step-up in basis.
Grantor Can Retain Limited Power of Appointment (LPOA)
Purpose of Retaining LPOA
The purpose of retaining a limited power of appointment is two-fold:
- The grantor retains control to designate new beneficiaries
- The gift is an incomplete gift for purposes of the gift tax
- Flexibility in case of changed circumstances (e.g., one or both spouses needs institutional care before the look back period expires)
Gift Tax: Gift Is Incomplete and Not Taxable
Grantor Can Retain Right to Change the Trustee
For gift tax purposes, a MAPT can be structured so the transfer to the trust is a taxable gift or a non-taxable gift. Typically, MAPTs are structured so are incomplete gifts.
|Retain . . .||Income||Principal|
|Retain income||Not gift||Gift, might be valued under IRC 7202|
|Retain LPOA||n/a||Not gift|
|Retain income and LPOA||Not gift||Not gift|
Coordinate MAPT with Other Planning Tools
MAPT and Will
MAPT and Power of Attorney
MAPT and Pooled Trust
A MAPT must be properly drafted, and there is always the risk that Medicaid will make a novel argument to attempt to reach the trust’s assets. ↩