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Why Is Medicaid Planning Popular?
Although none of us really enjoy thinking about it, the reality is, we all stand a good chance of ending up in long-term care (LTC) at some point. The longer you live, the greater the odds are you will need LTC. The cost of that care will likely be prohibitive and could quickly diminish your retirement nest egg if you do not get help covering the cost.
While most seniors count on Medicare to cover most of their health care expenses, one thing Medicare will not cover is the cost of LTC. Private health insurance policies also routinely exclude costs associated with LTC unless you purchased a separate policy at an additional cost.
According to the AARP Public Policy Institute, the average cost of a year’s care in a private Medicare-certified long-term nursing home room is $104,000. The average in-home care costs $49,920 a year for 40 hours of help per week. A year in a 1-bedroom assisted living care facility averaged $57,000 per year.1
The good news is that Medicaid does cover LTC costs. In fact, over half of all seniors in LTC depend on Medicaid to help cover the cost of that care. Before you can start counting on Medicaid to help, in the event you end up in LTC, you must first be eligible for Medicaid benefits.
Because Medicaid is intended to aid financially needy individuals and families, your income and “countable resources” cannot exceed the program eligibility limits. In many states, the countable resources limit is as low as $2,000 for an individual applicant. Although Medicaid does exempt some assets from consideration when calculating the value of an applicant’s countable resources, many seniors find that their non-exempt assets exceed the limit if they failed to plan using Medicaid planning tools and strategies.
Edem Hado and Harriet Komisar, “Long-Term Services and Supports.” AARP Public Policy Institute, August 2019
Qualifying for Medicaid
Medicaid is a health care program that is primarily funded by the federal government but is administered by the individual states within federal guidelines. Consequently, the eligibility and benefits offered can vary somewhat from state to state. Because Medicaid is a “needs-based” program, all states use income and asset limits when determining eligibility. For a single person, if the value of your available resources exceeds the program limit, typically $2,000, you do not qualify. If you are married, there is a gap in your spouse’s assets too. A hasty transfer of assets in anticipation of the need to qualify for Medicaid, however, is not the answer if your assets exceed the limit because of the Medicaid five-year “look-back” rules.
Medicaid Look-Back Rules
There was a time when you could transfer assets at the point when you realized you needed to qualify for Medicaid without incurring sanctions. However, changes to the Medicaid eligibility rules now make that impossible. Medicaid now uses a five-year “look-back” rule when evaluating applicants. The rule allows Medicaid to review your finances for asset transfers during the five-year period prior to your application. Transfers made for less than fair market value, “uncompensated transfers,” will cause a penalty period of disqualification starting when the applicant would be otherwise qualified to receive and in need of Medicaid benefits. The length of the disqualification period is determined by dividing the uncompensated transfer by the average monthly cost of LTC private pay in your area.
For example, imagine you have uncompensated transfers of $118,000 and the average monthly cost of LTC in your area is $8,000. You would divide $118,000 by $8,000 for 14.75. Rounding up, your disqualification period would be 15 months. During that time, you would not be qualified for Medicaid.
Medicaid Spend-Down Rules
At an average cost of $104,000 a year nationwide, the average person cannot afford to spend much time in long-term care (LTC) without putting a serious dent in their financial position. Consequently, over half of all seniors in LTC turn to Medicaid for help. Medicaid can help cover LTC expenses, however, since Medicaid is a “needs-based” federal program, an applicant must first demonstrate a need for benefits to qualify for assistance. Both your income and your “countable resources” will be considered when you apply for Medicaid. Countable resources include bank accounts, brokerage accounts, and all other assets that are not exempt, such as your primary residence (up to an equity limit).
If your countable resources exceed the paltry limit ($2,000 total for an individual applicant in most states), Medicaid will deny your application. To meet the Medicaid eligibility guidelines, then you would need to engage in what is referred to as Medicaid “spend-down.” In practical terms, this means you would need to reduce your countable resources until the value of those resources is below the Medicaid limit. Only after your assets had dwindled down to below the resources limit would Medicaid consider approving your application.
If you have additional questions about the Medicaid transfer rules, or you wish to know more about a Medicaid spend-down strategy, please consult with your experienced Louisiana estate planning and elder law attorney. (504) 831-2348 or submit your pre-consultation form and we will contact you to schedule an appointment.
Medicaid Spend-Down Strategies
If you find that you (or a spouse) need to qualify for Medicaid, and your non-exempt assets exceed the asset limit, you may be able to implement a Medicaid “spend-down strategy” that involves spending your excess assets on things that will effectively lower your non-exempt asset total. Examples of things that may qualify include:
- Paying down or paying off a mortgage on your principal residence
- Purchasing a new home
- Making home improvements
- Purchasing household furnishings
- Purchasing a new car or making car improvements
- Purchasing pre-paid funeral plans
Keep in mind the rules regarding what can be part of your spend-down strategy will vary somewhat depending on your state of residence. Be sure to consult with board-certified estate planning and elder law attorney before implementing a Medicaid spend-down strategy to ensure your planned expenses qualify.
What Assets Are Exempt?
Medicaid does exempt some assets from the countable resources’ calculation. Because Medicaid is administered by the individual states, there will be some differences in the assets a state considers exempt. However, common examples include:
- Principal place of residence, lot, and sale proceeds if another residence is purchased within 3 months of the sale
- Household goods and personal effects up to a specified amount
- Engagement and wedding rings
- Automobile used for necessary transportation, such as for transportation to employment or medical treatments
- Business property
- Life insurance policies up to a specified amount
Can an Irrevocable Income Only Trust Help?
Fortunately, there is a way to protect the family wealth and still qualify for Medicaid through the creation of an Irrevocable Income Only Trust. Keep in mind the goal is to reduce the value of your “countable resources” so you, or your spouse, can qualify for Medicaid.
An Irrevocable Income Only Trust accomplishes that goal by transferring your “excess” assets into the trust and providing you with income only from the trust. Because the trust is an Irrevocable Trust, assets you transfer into the trust are no longer legally considered to be yours. As such, they will not be counted when determining the value of your “countable resources.” Eventually, the trust assets will pass to heirs after the death of the surviving spouse.
In the meantime, you would receive income from the trust. When in LTC expenses more than your allowable income would be covered by Medicaid. If your trust income is excessive, your estate planning attorney may be able to utilize additional Medicaid planning tools to reduce the amount of countable income you have when you apply for Medicaid benefits.
Medicaid Estate Recovery
The longer you live, the greater the odds are that you, or a spouse, will need long-term nursing home care. To cover the cost of that care, you may find yourself turning to Medicaid for help.
You may have heard, however, that to qualify for Medicaid you need to sell your home and use the proceeds to cover expenses first. Someone else may have told you that you can probably avoid selling your home when you apply for Medicaid; however, the state will take it after your death as reimbursement for the money Medicaid spent on you while you were alive. Perhaps the home has been in your family for generations and you hoped to pass it down to your son or daughter. Will you be able to keep your home and realize your dream of passing down the family home?
What Is Medicaid Estate Recovery, and Do You Need to Worry About It?
As you can imagine, Medicaid expends a significant amount of money on participants of the program who need nursing home care. To recover some of those funds, federal law requires the individual states to make a claim against the estate of a Medicaid recipient after their death. Known as the “Medicaid Estate Recovery Program,” or MERP, this program is what your friend was referring to when they told you that you might lose the house after your death. Once again, however, there may be a way to save your home and pass it down to the next generation, as you had planned.
In general, the MERP rules allow the state to file a claim against the estate of the last surviving spouse. If it was your spouse who needed nursing home care instead of you, the state cannot pursue recovery from your spouse’s estate if you are still alive and living in the home. The state can, however, file a claim against your estate when you die.
As with the asset exemptions used when determining initial Medicaid eligibility, each individual state also determines the exceptions to the estate recovery program. Some common examples where the state will decline to pursue a claim against the estate of a Medicaid recipient (or spouse) include:
- There is a child under the age of 21 living in the home
- There is a disabled child of any age living in the home
- The value of the estate is below a specific value
- The Medicaid expenses are below a specific amount
- Pursuing a claim would cause an “undue hardship” on the heirs
If your home falls into one of the exceptions for your state, you will not need to worry about losing the home to the Medicaid Estate Recovery Program. Even if your home does not fall neatly into one of the exceptions, you may still be able to avoid losing the house through careful estate planning. Using a trust, joint tenancy, and/or gifting may protect your home so it can be passed down to your daughter when you are gone.
The key to ensuring that your assets are protected, and you qualify for Medicaid when needed is to work closely with an experienced estate planning and elder law attorney to include Medicaid planning in your overall estate plan. For more information or to schedule an initial consultation with our Medicaid planning attorney, call (504) 831-2348 or contact us through our website. We advise and represent clients throughout southeast Louisiana.