Medicaid Trust in Massachusetts: Look-Back, Trustees, and Taxes

A Medicaid trust in Massachusetts is an irrevocable trust that holds your home and savings in a way that keeps them from counting against the MassHealth asset limit for long-term care. MassHealth caps countable assets at $2,000 for a single applicant, so without planning, most people must spend nearly everything they have before nursing-facility coverage begins.¹ The trust works by permanently moving assets out of your ownership, so they are no longer yours to spend and no longer yours to count. The catch is that the move has to happen at least five years before you apply, the trust has to be drafted so you cannot pull the principal back, and the tax side has to be handled with care.

What the Trust Is Protecting You From

The reason to do any of this is MassHealth estate recovery. After a MassHealth recipient dies, the state can recover the cost of nursing-facility care and home-based waiver services from the deceased person’s estate under Chapter 118E, Section 31 of the Massachusetts General Laws.² Recovery is delayed while a surviving spouse is alive, or while a child under 21 or a blind or disabled child survives, but otherwise MassHealth will pursue whatever you leave behind.

While you are still living, Massachusetts can also record a lien against your real property under 130 CMR 515.012 if you are in a nursing facility and not expected to return home. The lien gives the state a claim on the sale proceeds. It cannot be placed if your spouse, a child under 21, a disabled child, or a sibling co-owner who has lived in the home for at least a year still occupies it, and it must be removed if you return home.³ A properly funded irrevocable trust takes the property out of your estate entirely, so there is nothing for the state to attach or recover from.

What Makes a Trust MassHealth-Compliant

The entire strategy turns on one line in 130 CMR 520.023: any trust you can undo, amend, or revoke is treated as if the assets are still yours, and the full principal counts against the $2,000 limit.⁴ To make the assets non-countable, the trust must be irrevocable, meaning you permanently give up the right to dissolve it, change its terms, or get the principal back.

Even an irrevocable trust can fail. MassHealth applies what practitioners call the “any circumstances” test: if the trust language allows the trustee any discretion at all to pay principal to you or for your benefit, the entire amount that could potentially reach you is counted as your asset.⁴ A single sentence giving the trustee power to distribute principal “for the grantor’s health, education, maintenance, or support” is enough to sink the trust. You can usually be paid income the trust generates, such as interest or dividends, but never the principal itself.

Keeping the Right to Live in Your Home

In Daley v. Secretary of the Executive Office of Health and Human Services (2017), the Massachusetts Supreme Judicial Court held that when a trust owns your home and you retain a right to live there, that occupancy right does not turn the home equity into a countable asset. Living in the home is treated as income from the trust’s assets rather than as a payment of principal.⁵ That is why most Medicaid trusts in Massachusetts include a right of use and occupancy for the grantor’s primary residence. Without it, transferring your home into the trust could mean losing the right to live there.

The Limited Power of Appointment

Most well-drafted Medicaid trusts give the grantor a limited power of appointment. This lets you change who ultimately inherits the trust assets after your death, even though you cannot get the assets back yourself. The key restriction is that you can redirect assets only to people other than yourself, your estate, your creditors, or your estate’s creditors. Keep those four categories excluded and MassHealth has no grounds to count the trust as your asset.

This flexibility matters more than people expect. A child who seems financially responsible when you create the trust may later develop problems that make an outright inheritance a bad idea. The limited power lets you redirect that share through your will without undoing the trust or restarting the look-back clock. Retaining this power also pulls the trust assets back into your taxable estate, which turns out to matter a great deal for capital gains, as explained below.

The Five-Year Look-Back

Creating the trust is only half the job. MassHealth examines every asset transfer made during the 60 months before you apply for long-term care benefits. The look-back was expanded from 36 months by the federal Deficit Reduction Act of 2005 and applies to any transfer for less than fair market value, including transfers into an irrevocable trust.⁶ If you fund the trust and apply within five years, the transfer triggers a penalty period during which you are ineligible for nursing-facility coverage.

The penalty is the total uncompensated value of the transferred assets divided by the average monthly cost of nursing-facility care in Massachusetts at the time of application.⁷ The most recently published daily rate is $441, roughly $13,400 a month. At that rate, moving $300,000 into a trust produces a penalty of about 22 months during which you must pay privately. MassHealth adjusts the rate periodically, so the exact length depends on the rate in effect when you apply.

The crucial detail is when the penalty starts. For transfers made on or after February 8, 2006, the penalty begins on the later of two dates: the first day of the month the transfer occurred, or the date you are otherwise eligible for long-term care benefits and already in a facility.⁷ In practice, the clock usually starts ticking only after you have already spent down to $2,000 and entered a nursing home. That gap is where families get into trouble: you need care, you qualify financially, but benefits are blocked because a transfer penalty is running. Fund the trust at least five full years before any anticipated need, and you avoid the problem entirely.

Choosing a Trustee

The trustee manages the trust’s assets and must act in the best interest of the named beneficiaries. You cannot serve as your own trustee, and your spouse should not either. MassHealth treats a married couple’s assets as largely intertwined, so giving your spouse discretionary control over trust principal can cause the entire trust to be counted. Most families name an adult child, another trusted relative, or a professional fiduciary. The trustee handles investment decisions, tax filings, property maintenance, and any distributions the trust permits.

Name at least one successor trustee. If the primary trustee becomes unable or unwilling to serve, the trust needs someone to step in without going to court, and the document should spell the succession out clearly.

If You Are Married

When one spouse needs nursing-facility care and the other remains at home, MassHealth does not require the at-home spouse to impoverish themselves. The community spouse can retain up to $162,660 in countable assets for 2026, known as the Community Spouse Resource Allowance.¹ Assets above that threshold count as available to the institutionalized spouse.

A Medicaid trust can work alongside spousal protections, but transfers made by either spouse during the 60-month window still affect the institutionalized spouse’s eligibility. Both spouses’ financial pictures need to be planned together, not separately.

Taxes: Gift Return Now, Capital Gains Later

Transferring assets into an irrevocable trust is a completed gift for federal tax purposes. You must file a gift tax return (Form 709) for the year of the transfer. In most cases no tax is owed, because the federal lifetime gift and estate tax exemption for 2026 is $15,000,000 per person after the legislation signed in July 2025.⁸ The return still has to be filed to document the use of your exemption.

The bigger tax issue hits your heirs. Under normal inheritance rules, Internal Revenue Code Section 1014 gives inherited assets a tax basis equal to the fair market value at the date of death.⁹ A house bought for $150,000 and worth $500,000 at your death passes to your children at the $500,000 value, and they owe no capital gains on the appreciation.

In Revenue Ruling 2023-2, the IRS clarified that assets in a standard irrevocable grantor trust do not automatically receive this step-up when the grantor dies. Because the assets left your estate when you transferred them in, they are no longer “acquired from a decedent” under Section 1014. The trust keeps the original cost basis, and your beneficiaries can face significant capital gains tax if they sell appreciated property.¹⁰

This is where the limited power of appointment earns its keep. If the trust is drafted so you retain that power, the trust corpus is included in your taxable estate under IRC Section 2038, and that inclusion triggers the step-up in basis at your death. With the federal estate exemption at $15 million, most families face no estate tax from the inclusion but gain the full basis adjustment. A well-drafted Massachusetts Medicaid trust threads the needle: irrevocable enough to protect assets from MassHealth, but with a retained power that preserves the step-up for your heirs.

What Goes In, What Stays Out

Your primary home is usually the first asset transferred, because it is typically the largest thing MassHealth could pursue through estate recovery or a lien. Non-retirement investment accounts and savings beyond what you need for daily expenses are strong candidates too. Vehicles you use daily are generally kept out, since they are often exempt from the MassHealth asset count anyway.

Retirement accounts like IRAs and 401(k)s are a different story. Transferring a tax-deferred retirement account into a trust triggers immediate income tax on the full balance, because the transfer counts as a distribution. For most people the tax hit outweighs the Medicaid benefit. These accounts are usually better handled through beneficiary designations and careful spend-down rather than trust transfers.

Setting It Up

Your attorney will need full legal names and identifying information for the grantor, primary trustee, successor trustees, and remainder beneficiaries, plus a complete inventory of the assets going in: current deeds with the book and page numbers from the registry, and recent statements for any financial accounts to be transferred. Legal fees for drafting a Medicaid-compliant irrevocable trust in Massachusetts typically run from about $2,000 to $12,000, depending on complexity.

The grantor and trustee sign the document before a Massachusetts notary public. The trustee then applies to the IRS for an Employer Identification Number using Form SS-4, which gives the trust its own tax identity separate from your Social Security number.¹¹

Funding is what makes the trust real. For real estate, you execute a new deed from your name to the trust and record it at the appropriate Massachusetts Registry of Deeds. The deed recording fee is $155, and recording the declaration of trust itself costs an additional $255.¹² For bank and brokerage accounts, the trustee presents the signed trust document and the EIN to retitle the accounts. Until assets are actually retitled, they remain in your name and fully countable, no matter what the trust document says.

When to Do This

The five-year look-back is the single biggest constraint in Medicaid trust planning. Wait until a health crisis to act and you are almost certainly too late for the trust to help with the immediate need. Any assets transferred within 60 months of your MassHealth application create a penalty, and the penalty does not start until you are already in a facility and otherwise eligible.⁴ During that window you pay privately, at well over $13,000 a month.

The practical sweet spot is to establish the trust when you are healthy and have no foreseeable need for long-term care, typically in your mid-to-late 60s. That buys you a comfortable buffer past the five-year window and leaves time to move additional assets in later while the clock on the earliest transfers keeps running. Waiting until 80 with declining health narrows your options sharply and raises the odds that care will arrive before the penalty period expires.

1
Mass.gov. Program Financial Guidelines for Certain MassHealth Applicants and Members
2
General Court of Massachusetts. Massachusetts General Laws Chapter 118E Section 31
3
Mass.gov. Overview of the Office of Medicaid (MassHealth) Review of Estate Recovery
4
Cornell Law Institute. 130 CMR 520.023 – Trusts or Similar Legal Devices Created on or After August 11, 1993
5
Justia Law. Daley v. Secretary of Executive Office of Health and Human Services
6
MassHealth. MassHealth Eligibility Letter 174 – Revisions to Look-Back Periods for Transfers Into or From Trusts
7
MassHealth. 130 CMR 520.000 – MassHealth Financial Eligibility
8
Internal Revenue Service. What’s New – Estate and Gift Tax
9
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
10
Internal Revenue Service. Internal Revenue Bulletin 2023-16 – Revenue Ruling 2023-2
11
Internal Revenue Service. Instructions for Form SS-4
12
Secretary of the Commonwealth of Massachusetts. Registry of Deeds Fee Schedule