How a Medicaid Asset Protection Trust Works in Illinois

An Illinois Medicaid Asset Protection Trust is an irrevocable trust you fund with your home, savings, or investments so those assets no longer count against Illinois Medicaid’s financial limits for long-term care benefits. It works only if the trust blocks any principal from coming back to you, and only if you fund it at least five years before applying. Illinois raised its Medicaid asset limit to $17,500 in 2023, but nursing home costs above $8,000 a month burn through that quickly, which is why the trust remains a live planning tool for anyone with meaningful property to protect.¹

How the Trust Removes Assets From Medicaid’s Count

Illinois divides trusts into two categories under 89 Ill. Adm. Code 120.347, and only one of them helps you. A revocable trust is treated as your own money because you can undo it whenever you want. An irrevocable trust gets a split analysis: any portion from which a payment could still be made to you counts as available, and only the portion locked completely away from you is treated as a real transfer.²

That is why a Medicaid Asset Protection Trust has to be built two ways at once. First, irrevocable. Once signed, you cannot dissolve it, rewrite the terms in your favor, or pull anything back. Second, it must follow the “no-benefit” rule: the document has to prevent any distribution of principal to you or for your benefit. The Department of Healthcare and Family Services does not care whether the trustee has ever actually paid you. If the language allows it, the state counts it.

The trustee should be someone other than you or your spouse. If either of you serves as trustee with any discretion over distributions, HFS is likely to treat the assets as available. Most families name an adult child, another trusted relative, or a professional fiduciary. Professional trustees typically charge 0.5% to 1.5% of trust assets per year, which is why many families keep the role in the family and reserve paid management for larger or more complex portfolios.

The 60-Month Look-Back and Why Timing Is Everything

When you apply for Medicaid long-term care benefits, Illinois reviews your financial records for the 60 months before your application to find transfers made for less than fair market value.³ Moving assets into a Medicaid Asset Protection Trust is exactly that kind of transfer, because you receive nothing in exchange. Federal law under 42 U.S.C. § 1396p sets this 60-month window for trust transfers and other asset disposals made on or after February 8, 2006.⁴

If HFS finds a transfer inside the window, it calculates a penalty period by dividing the value of what you transferred by the state’s average monthly private-pay nursing home cost at the time of application.⁴ During that penalty, Medicaid pays nothing toward your care and you cover the full cost yourself. Transfer $200,000 with a $9,000 divisor, and you are looking at roughly 22 months of ineligibility. The divisor changes over time, so an elder law attorney should confirm the current figure at the time of application.

Here is the trap. The penalty clock does not start when you make the transfer. It starts when you would otherwise be eligible for Medicaid, meaning after you have already spent down and applied. People transfer assets, assume five years is running, enter a nursing home three years later, and then discover they still owe two years of private pay with the money already gone. Planning five or more years ahead is the only reliable way around this. Families who benefit most from these trusts usually start in their late 60s or early 70s, while everyone is healthy and no crisis is forcing the timeline.

What Goes Into the Trust

The most common asset is the home. During your lifetime, your primary residence is typically exempt from Medicaid’s asset count as long as you or a qualifying family member lives there, but that exemption disappears after death. Illinois runs a Medicaid Estate Recovery Program that can pursue reimbursement from your estate for benefits paid during your life.⁵ A home held in a properly structured irrevocable trust is not part of your estate and is beyond the state’s reach for recovery.

Beyond the home, families typically fund the trust with non-retirement investment accounts, savings, certificates of deposit, and other non-exempt financial holdings. Retirement accounts are usually poor candidates because transferring an IRA or 401(k) into an irrevocable trust triggers immediate income tax on the full balance.

Trust income needs its own attention. If the trust document sends interest or dividends back to you, that money counts toward your monthly Medicaid income limit. Some trusts are drafted intentionally to allow income to the settlor while locking the principal away, which can help cover living expenses in the years before you need care.

Illinois’s Asset Limit and What It Doesn’t Count

Illinois allows a single Medicaid applicant to hold up to $17,500 in countable assets, a figure that took effect in May 2023 and applies regardless of household size for AABD medical cases.¹ Certain assets do not count against it. Illinois excludes your home while you or a qualifying family member lives there, personal belongings and household goods of reasonable value, certain income-producing resources, and one automobile if someone in the household needs it for work, medical appointments, or essential daily transportation.⁶ You do not need a trust to protect what is already exempt during your lifetime. The trust is for the non-exempt savings and investments, and for the home when the goal is to keep it out of estate recovery after you die.

When You May Not Need a Trust at All

Two situations often make the trust unnecessary or overbuilt.

The first is marriage. When one spouse needs nursing home care and the other stays home, Illinois applies the Community Spouse Resource Allowance. The community spouse can keep a protected amount of countable assets, which for 2026 runs up to approximately $162,660, while the applicant spouse spends down to the $17,500 individual limit.¹ Couples whose combined countable assets fit within the CSRA may need no trust at all. Planning becomes more useful when the couple’s assets significantly exceed the allowance, or when they want the home shielded from estate recovery after both spouses die.

The second is that federal law exempts several transfers from the look-back entirely, even the day before you apply. These can sometimes protect assets without a trust:

Transfers to a spouse, at any time and in any amount.
Transfers to a child who is blind or permanently disabled, at any age.
Transfers to a child under 21.
Transfer of the home to an adult child who lived with you for at least two years immediately before your nursing home admission and provided care that delayed institutionalization (the caretaker child exception).
Transfer of the home to a sibling who already holds an equity interest and lived there for at least one year immediately before you entered a facility.

The caretaker child exception is the one families try most and get wrong most. HFS wants proof the child actually lived in the home, that the care was substantial enough to delay institutional placement, and that the arrangement ran the full two consecutive years before admission. “Helping Mom out” is not enough.

Tax Trade-Offs Worth Weighing

The Medicaid outcome is only half the picture. Moving assets into an irrevocable trust changes the tax treatment in ways that sometimes eat into what the trust saves.

Loss of Stepped-Up Basis

Under IRS Revenue Ruling 2023-2, assets held in an irrevocable trust that are not included in the grantor’s taxable estate do not receive a stepped-up basis at death.⁷ If you bought your home for $100,000, put it in the trust, and your children sell it for $400,000 after your death, they owe capital gains tax on the $300,000 spread. Had they inherited it outright, they would have taken it at $400,000 basis and owed nothing on a sale at that price. For a family whose main asset is a long-held, appreciated home, that capital gains bill can rival what estate recovery would have cost.

Trust Income Tax

An irrevocable trust with investment income files its own federal return (Form 1041) and pays tax on undistributed income. Trust brackets are compressed, so the top marginal rate hits at a much lower income level than for an individual. Distributing income to beneficiaries shifts the tax to their personal returns.

Illinois Estate Tax

Illinois imposes its own estate tax with a $4 million exemption, well below the $15 million federal exemption for 2026.⁸⁹ Assets properly transferred to an irrevocable trust are generally removed from your taxable estate, which can matter for families over the $4 million line. Below it, this benefit is irrelevant.

Setting Up the Trust in Illinois

The trust should be drafted by an attorney experienced in Illinois elder law. The document names the settlor (you), the trustee, and the remainder beneficiaries who receive the assets later. The language blocking distributions to you must be tight, because HFS caseworkers will read it carefully years down the road when you actually apply. Every asset you plan to protect belongs on the trust’s Schedule A.

Illinois does not require witnesses for a trust to be valid. Notarization is not strictly required for the trust document itself either, though most attorneys notarize as a practical matter because the deed transferring real estate into the trust must be notarized to record.

Transferring the Home

Moving your home into the trust takes a deed, typically a quitclaim, from you individually to the trustee. It gets recorded at the County Recorder of Deeds where the property sits. Recording fees vary; many Illinois counties run around $84.¹⁰ A PTAX-203 Illinois Real Estate Transfer Declaration goes with the deed, and transfers into trusts where you remain the beneficiary are generally exempt from the transfer tax itself.

One thing families miss: transferring your home to a trust can jeopardize your title insurance. Many policies insure a specific named owner, and coverage can lapse when title moves. Call your title insurer before recording. Most will add the trust as a named insured by endorsement for a small fee or at no cost, but you have to ask.

Retitling Financial Accounts

Bank and investment accounts have to be retitled into the trust. You give the financial institution a certification of trust, a short document that confirms the trust’s existence and the trustee’s authority without disclosing the full terms or the beneficiaries.¹¹ Until the account is actually retitled, it is still in your name and still counts as your asset, whatever the trust document says.

Cost

Attorney fees to design and draft a Medicaid Asset Protection Trust in Illinois generally run from $2,000 to $12,000, depending on the assets involved, whether real estate is part of the plan, and the attorney’s market. Add recording fees for any deeds and minor costs for retitling financial accounts, which institutions usually handle for free. This is not a document to draft yourself. A trust that fails HFS review because of a drafting mistake does not just waste the fee; it leaves the assets exposed after you have already spent five years waiting out the look-back.

One boundary worth flagging. A Medicaid Asset Protection Trust handles assets. If your monthly income exceeds the Illinois nursing home Medicaid income limit of approximately $2,901 (300% of the federal benefit rate), you need a separate tool called a Qualified Income Trust, sometimes called a Miller Trust, to hold the excess. It is a different instrument for a different problem, and one does not substitute for the other.

1
Illinois Department of Human Services. PM 07-02-01 – Asset Limits
2
Cornell Law School. Illinois Admin Code Title 89, 120.347 – Treatment of Trusts and Annuities
3
Illinois Department of Healthcare and Family Services. Highlights of New Eligibility Requirements for Long Term Care
4
Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
5
Illinois Department of Healthcare and Family Services. Guide to the Medicaid Estate Recovery Program
6
Illinois Department of Healthcare and Family Services. Healthcare and Family Services Medical Benefits
7
Internal Revenue Service. Internal Revenue Bulletin 2023-16, Rev. Rul. 2023-2
8
Office of the Illinois Attorney General. Estate Tax Instruction Fact Sheet
9
Internal Revenue Service. Whats New – Estate and Gift Tax
10
Fayette County Illinois. Fayette County Recording Fee Schedule
11
Illinois General Assembly. Illinois Code 760 ILCS 3/1013 – Certification of Trust