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Medicaid Planning and Asset Protection

Many people wish to become eligible for Medicaid, while also preserving their assets for their families or beneficiaries. Given that Medicaid was enacted primarily for the benefit of individuals with very low incomes and net worth, it is very difficult legally to shelter wealth and for assets not to be counted in determining Medicaid eligibility. In this blog, I discuss the limited ways that individuals may protect their assets from spend-down requirements.

Deficit Reduction Act

The enactment of the Deficit Reduction Act (DRA) sought to eliminate gifting strategies as a means to meet Medicaid eligibility. If any gifts were made in the 60 months prior to applying to Medicaid, the value of those gifts is deemed to have been available for nursing home expenses and therefore delays eligibility. The ineligible period is equal to the amount gifted divided by the average cost of nursing home care in your region.

For example, $100,000 in assets gifted in the last 60 months with a monthly cost of $5,000 would result in 20 months of ineligibility. The ineligible period begins when the applicant is approved to enter the nursing home. Unfortunately, individuals who have pure intentions in gifting may still jeopardize their chances to utilize Medicaid.

Transferring assets to become eligible for Medicaid involves complex strategies and requires very careful planning. Here are some options:

Irrevocable Trust: An Irrevocable Trust as an income-only trust. Once the assets are placed inside the trust, they are not counted as resources for Medicaid eligibility. The trustee holds legal title to the property for the benefit of others. These assets cannot be applied to you or your spouse, but you can receive income to pay for your living expenses.

However, if you enter a nursing home, your trust income must pay the expenses. Also be aware that you lose permanent control when you transfer assets to an Irrevocable Trust. Furthermore, the method for counting assets and for determining whether Medicaid resource limits are met may vary from state to state. Finally, when you fund an Irrevocable Trust, you may be subject to the five year look-back rule.

Testamentary Trust: This type of trust enjoys a protected status in Medicaid qualification in that the trust protects eligibility of the beneficiary, but not the grantor. A Testamentary Trust is funded by or through a will, and the property and income received from the trust by the beneficiary are designated as non-countable assets. For additional protection of the assets, the trust is designated as fully discretionary, allowing all payments of income and principal to be made solely within the trustee’s discretion.

In addition, directions to the trustee can clearly state that the trust be used to supplement the beneficiary’s needs and not to supplant any public or private benefits. This provides further protection for receiving Medicaid benefits. In summary, a Testamentary Trust may provide a way to protect the assets of a surviving spouse and enhance the chances of Medicaid eligibility.

Special Needs Trust: With a Special Needs Trust, Medicaid allows transfers for disabled people under age 65. Even after entering a nursing home, you can transfer assets to a disabled child, relative, or friend without incurring a period of ineligibility. If structured properly, the assets are not considered to belong to the beneficiary of the trust in determining his or her Medicaid eligibility. However, when the disabled person dies, the state must be reimbursed for any funds spent in behalf of the disabled person. Only after the state is reimbursed can any excess funds pass to the other beneficiary.

Annuity: Married couples may buy a single premium annuity with countable assets to benefit the well spouse. This strategy allows the institutionalized spouse to qualify for Medicaid more easily, while maintaining the well spouse’s standard of living. However, the DRA requires the state to be named as a beneficiary of the annuity (if purchased on or after February 8, 2006) after your spouse, minor or disabled child.

The major purpose of Medicaid is to benefit the medical needs of low-income families and children. A controversial federal law purports to impose criminal penalties on a person who assists or counsels individuals in transferring assets to meet Medicaid eligibility. However, the U.S. Department of Justice has chosen not to enforce this criminal provision and has been enjoined by a federal district court from enforcing it. That being said, to utilize financial planning strategies for the sole purpose of becoming eligible for Medicaid may have far more negative outcomes than expected.

Consider reviewing your elder care plan with a CERTIFIED FINANCIAL PLANNER™ professional and a qualified attorney to determine how to best meet your objectives.

Registered Representative of and Securities and Investment Advisory Services offered through Cetera Advisor Networks LLC, member FINRA/SIPC. Reid Financial and Cetera Advisor Networks are not affiliated.

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