Can a Living Trust Protect Assets From Medicaid?

A living trust can protect assets from Medicaid, but only if it is the right kind of trust and only if you set it up in time. A standard revocable living trust offers no protection at all, because you keep control of everything inside it and Medicaid counts it as yours. An irrevocable trust can shield assets, but you have to give up control permanently and fund the trust at least five years before you apply for Medicaid long-term care benefits. Get the structure or the timing wrong and the strategy fails.

Why a Revocable Trust Does Nothing for Medicaid

A revocable living trust is an estate-planning tool, not a Medicaid-planning tool. You create it, move assets in, and keep managing them as trustee. You can change the terms, take property back out, or dissolve the trust whenever you want. That flexibility is the whole point for avoiding probate. It is also what makes the trust worthless as protection.

Federal law is explicit: the entire corpus of a revocable trust is treated as a resource available to the person who created it.¹ Payments from the trust to you count as income. Payments to someone else count as a transfer subject to penalties. Medicaid sees straight through the structure. Money in a revocable trust is treated the same as money in your checking account.

This matters because Medicaid’s asset limit is punishing. In most states, an individual applicant can hold no more than $2,000 in countable assets. A married couple where both spouses apply is capped at $3,000. With a private nursing home room averaging roughly $10,000 a month nationally, a lifetime of savings can vanish inside two years. That is what pushes families to look for real protection.

How an Irrevocable Trust Actually Protects Assets

An irrevocable trust works because you permanently give up control. Once assets go in, you cannot serve as trustee, cannot change the terms, and cannot pull anything back out. Someone else, usually an adult child or a professional fiduciary, manages the trust under its written terms.

Under the same federal statute, the portion of an irrevocable trust from which no payment could ever be made to you or for your benefit is not counted as your resource.¹ That is the mechanism a Medicaid Asset Protection Trust relies on. The trust document bars the trustee from distributing principal to you or your spouse, so Medicaid cannot count the principal. The trust can still pay you the income the assets generate, such as interest or dividends, and that income will count toward your eligibility and your required contribution to care. The principal stays protected for your beneficiaries.

The trust also puts assets outside Medicaid estate recovery. Federal law requires every state to seek reimbursement from the estate of a Medicaid recipient who was 55 or older when they received benefits.¹ Assets in a properly structured irrevocable trust are owned by the trust, not by you, so they sit outside your probate estate and the state cannot reach them after you die.

Who Can Serve as Trustee

The trustee choice is not just administrative. It decides whether the trust works. Neither you nor your spouse can serve. If either of you keeps any control over distributions, Medicaid will treat the trust assets as available to you and count them. Most families name an adult child, another trusted relative, or a corporate trustee such as a bank or trust company. The trustee is legally bound to follow the trust’s terms, which means they cannot return principal to you even if you ask, and they cannot use trust funds to pay your personal bills unless the trust explicitly allows it for a purpose that will not make the funds countable.

The Five-Year Look-Back Is Everything

Moving assets into an irrevocable trust does not protect them instantly. When you apply for Medicaid long-term care, the state reviews every financial transaction you and your spouse made during the 60 months before your application.² Any transfer made for less than fair market value inside that window triggers a penalty period during which you are ineligible for benefits, even though you otherwise qualify.

The penalty length is calculated by dividing the value of the transferred assets by your state’s average monthly cost of nursing home care. Move $120,000 into a trust in a state where care averages $10,000 a month, and you face a 12-month penalty. You pay out of pocket during those months.

Here is the trap: the penalty clock does not start when you make the transfer. It starts on the date you would otherwise become eligible for Medicaid, which usually means the date you are already in a nursing facility and have spent down to the asset limit.² Transferring assets too late can leave you in a nursing home with no way to pay and no coverage.

For a Medicaid Asset Protection Trust to fully do its job, fund it at least five years before you apply. Waiting until a health crisis is already underway usually makes this strategy impossible or very expensive.

Transfers That Escape the Penalty

Not every transfer inside the look-back window is penalized. Federal law carves out specific exceptions, mostly involving the home.¹

A transfer of any asset to your spouse.
A transfer of the home to a child under 21.
A transfer of any asset to a child of any age who is blind or permanently disabled, or into a trust set up solely for that child’s benefit.
A transfer of the home to an adult child who lived with you for at least two years before you entered a nursing facility and provided care that let you stay home longer.
A transfer of the home to a sibling who already has an ownership interest in it and lived there for at least one year before you were institutionalized.

Assets can also be moved into a trust established solely for the benefit of a disabled individual under age 65. And a state may waive the penalty if you can show the transfer was made exclusively for a purpose other than qualifying for Medicaid, or that denying benefits would create an undue hardship. That last exception is narrow and hard to win.

Keeping the Home in the Trust

The family home is often the biggest asset people want to protect, and an irrevocable trust can hold it while you keep living there. Most Medicaid Asset Protection Trusts are drafted so the grantor retains a life estate or a right to occupy the property. You keep living in the house, paying the property taxes, and maintaining it. Legal title belongs to the trust, which puts the home beyond Medicaid’s reach once the five-year look-back has passed.

Retaining that right to live there also preserves property tax exemptions you would otherwise lose. If the home is sold during your lifetime, the life estate interest may let you claim the federal capital gains exclusion on the sale of a primary residence, up to $250,000 for an individual or $500,000 for a married couple. One catch: if the trust sells the home before you die, the proceeds belong to the trust and have to stay there. The trustee cannot hand them to you.

The Tax Cost Most Families Miss

Moving assets into an irrevocable trust changes how they are taxed at your death, and this catches families off guard. Normally, heirs who inherit appreciated property receive a stepped-up basis equal to the fair market value at death, wiping out unrealized capital gains. Assets in a standard irrevocable trust may not qualify for that step-up. If the trust is structured so the assets sit outside your taxable estate, the IRS treats them as keeping the original basis. Heirs who sell owe capital gains tax on all the appreciation going back to when you originally acquired the assets.

There is a workaround. Many attorneys draft Medicaid Asset Protection Trusts with a limited power of appointment that keeps the assets technically includable in your estate for tax purposes without giving you enough control to make them countable for Medicaid. That gets you both the Medicaid protection and the step-up. The language has to be precise. If your trust was drafted without it, the tax hit to your heirs can eat a large portion of what you saved by avoiding spend-down.

What You Give Up

The protection is real, and so is the cost. Losing access to the principal is the fundamental tradeoff. If an unexpected expense comes up, if you want to help a grandchild with college, or if you simply change your mind, you cannot reach into the trust. The trustee is legally barred from giving the money back, and no informal family understanding changes that.

You also lose the ability to make changes. Amending an irrevocable trust generally requires the beneficiaries’ consent or a court order. Relationships shift over decades, and locking in decisions about who controls your assets and who eventually inherits them can create friction you would not otherwise have.

Attorney fees for setting up a Medicaid Asset Protection Trust typically range from a few thousand dollars to $10,000 or more, depending on the complexity of your assets, whether real estate needs to be retitled, and where you live. The trust may also need its own tax return each year. None of that is wasted if the trust saves six figures in nursing home spend-down, but the strategy only pays off if you actually need Medicaid at least five years after funding. If you never need long-term care, or you need it during the look-back window, you have paid for lost flexibility with nothing in return.

Spousal Protections Exist Without Any Trust

If one spouse needs nursing home care and the other stays at home, federal spousal impoverishment rules already prevent the community spouse from being wiped out. The at-home spouse can keep assets up to a Community Spouse Resource Allowance, which in 2026 has a maximum of $162,660 and a floor of $32,532, with the exact amount set by state policy. The community spouse is also entitled to a Monthly Maintenance Needs Allowance from the nursing-home spouse’s income, up to $4,066.50 a month in 2026 with a floor of $2,643.75.³ These protections apply whether or not you have a trust. A trust can preserve additional assets above the CSRA for heirs, but the spousal allowances are not something you need a trust to unlock.

An irrevocable trust is not a set-it-and-forget-it fix. It is a permanent restructuring of your financial life that rewards people with a long runway and a clear plan, and punishes people who set it up too late or are not truly ready to let go. If you are considering one, price out the legal work, look at your health and your family situation honestly, and give yourself the five years the rule demands.

1
Office of the Law Revision Counsel. 42 US Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
2
CMS. Transfer of Assets in the Medicaid Program – Important Facts for State Policymakers
3
Centers for Medicare & Medicaid Services. 2026 SSI and Spousal Impoverishment Standards