Medicaid Trusts: What They Are, Why People Use Them, and the Parts That Get Left Out

by Corey Sunstrom, CFP®
Director of Financial Planning

If you’ve spent any time around retirement conversations, caregiving discussions, or estate planning chatter, you’ve almost certainly heard some version of this sentence: “We’ll just put everything in a trust so Medicaid pays for the nursing home.” It sounds clean. It sounds decisive. And unfortunately, it’s usually missing about half the story.

Medicaid trusts are real tools. They can be powerful when used the right way, at the right time, with realistic expectations. They can also create frustration, stress, and bad outcomes when they’re treated like a financial escape hatch instead of a long-term planning decision. Most of the confusion comes from the gap between what people think these trusts do and what actually happens when care is needed.

Long-term care is the reason this conversation exists in the first place. Medicare does not meaningfully cover custodial care. Long-term care insurance is increasingly rare. And eventually, many families run headfirst into Medicaid, often during a stressful or emotional moment. A fall. A diagnosis. A slow decline that suddenly accelerates. Medicaid will pay for nursing home care and certain in-home services, but only after strict financial eligibility rules are met. Those rules look closely at what you own, what income you receive, and what you’ve transferred away. Medicaid trusts exist because people want to understand those rules before they’re forced to play defense.

What a Medicaid Trust Actually Does (and Doesn’t Do)

A Medicaid trust, often called a Medicaid Asset Protection Trust, is a specific type of irrevocable trust designed to remove assets from your ownership for Medicaid eligibility purposes. That phrase “remove assets from your ownership” matters more than almost anything else in this discussion. Once assets are placed into this trust, you no longer control them in the way Medicaid defines ownership. You cannot change your mind later. You cannot pull principal back because circumstances changed. You cannot undo the transaction. The trust now owns those assets, and it follows the rules written into it.

Most commonly, people place their primary residence, non-retirement investment accounts, or savings into a Medicaid trust. Retirement accounts usually stay outside the trust because of income and tax rules. This structure isn’t a loophole or a trick. It’s a legal transfer of ownership that comes with real consequences. The permanence is what makes it effective, but it’s also what makes it unsuitable for people who value flexibility or may need access to those assets later.

One of the biggest reasons Medicaid trusts are misunderstood is the five-year look-back rule. Medicaid doesn’t just look at what you own today. It looks back five years from the date you apply to see whether you transferred assets for less than fair market value. If you did, Medicaid doesn’t ignore it. Instead, it imposes a penalty period during which it will not pay for care, even though you’re otherwise eligible. This is why Medicaid trusts are not emergency tools. They are proactive planning tools. When people try to use them late in the game, the results are often disappointing and stressful, not because the trust “failed,” but because the timing was wrong.

Where the Plan Meets Reality: Care Options Under Medicaid

When done early and intentionally, Medicaid trusts can absolutely work. They can protect assets from being fully consumed by long-term care costs once the look-back period has passed. They can help preserve a home that has emotional and legacy value for a family. They can create predictability during a chaotic time. When coordinated properly with estate planning, they can also simplify how assets eventually pass to heirs.

Where many plans fall apart is not the trust itself, but the assumptions people make about what life looks like after Medicaid eligibility is achieved. Medicaid does not mean “any facility you want, whenever you want.” Some nursing homes and care communities do not accept Medicaid at all. These are typically private-pay or long-term care insurance focused facilities. Others accept Medicaid only after a private-pay period, which can work well if planned for in advance. Then there are facilities that primarily serve Medicaid residents. These vary widely in quality. Some are excellent and well-run. Others are underfunded, understaffed, and stretched thin.

Medicaid reimbursement rates are lower than private pay. That reality affects staffing, renovations, and availability. The strongest Medicaid-accepting facilities often have waitlists and strict admission criteria. A Medicaid trust may help you qualify sooner, but it does not guarantee placement in a specific facility or a certain level of amenities. Financial eligibility and care experience are related, but they are not the same thing.

When Medicaid Trusts Work Well, and When They Don’t

A good example of a Medicaid trust working well is a couple in their early 60s who are healthy, financially stable, and thinking long-term. They place their home and a portion of their non-retirement assets into a trust well over five years before any health concerns arise. They keep enough income and liquid assets outside the trust to live comfortably. They also research local facilities early, identifying a few that accept Medicaid after a private-pay period and confirming policies in writing. Years later, when care is needed, one spouse enters as a private-pay resident and transitions smoothly to Medicaid without changing facilities. The home ultimately passes to children. The plan works because it was early, intentional, and realistic.

Contrast that with someone in their late 70s who hears about Medicaid trusts from a friend and moves assets into a trust two years before needing care. Medicaid applies a penalty period due to the look-back rule. During that penalty period, there is no coverage and insufficient cash to pay privately. Facility options narrow quickly. Stress skyrockets. The trust didn’t fail. The timing did.

Another common mismatch happens when a family plans early, qualifies successfully, but assumes access will automatically match expectations. When care is needed, preferred facilities either don’t accept Medicaid or have multi-year waitlists. The available option is farther away or lower quality than anticipated. Care is technically covered, but the experience feels like a compromise. This isn’t a planning failure so much as a reminder that eligibility does not equal unlimited choice.

Underneath all of this is something more human than legal or financial rules. Fear. Fear of losing independence. Fear of becoming a burden. Fear of watching a lifetime of savings disappear in a few difficult years. Those fears are valid. But planning driven purely by fear often focuses on protection without fully considering experience. Sometimes keeping assets accessible to preserve choice, even if it means less protection on paper, leads to a better outcome.

The real takeaway

A Medicaid trust is not a shortcut. It’s a commitment. It works best when done early, coordinated with income planning and estate documents, paired with realistic expectations about care options, and viewed as one tool rather than the entire plan. It works poorly when rushed, misunderstood, or treated as a guarantee.

The goal isn’t to beat the system. It’s to preserve dignity, reduce stress, and create options before options disappear. Good planning doesn’t promise certainty. It creates preparedness. And in long-term care conversations, preparedness is often the most valuable asset of all.

Safeguard Your Finances With Pro Guidance

Want to learn more about Medicaid trusts and how they could impact your finances? You don’t have to navigate this complex terrain alone. Working with an advisor can help you understand your options.

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