By Martin Schamis, CFP | Kiplinger
There’s a common misperception that Medicaid is only for poor and low-income seniors. But actually, with a little proper and thoughtful estate planning, all but the very wealthiest people can often qualify for program benefits.
In 1965, Congress established the Medicare program to enhance insurance coverage and ensure greater financial solvency for seniors — regardless of income, current health status or past medical history. At the same time, they outlined parameters for Medicaid —a state-managed, means-based program to provide additional coverage to low-income and disabled individuals and families.
Unlike Medicare, however, Medicaid is not a federally run program. Operating within broad federal guidelines, each individual state decides its own Medicaid eligibility criteria, eligible coverage groups, services covered, administrative and operating procedures, and payment levels.
What makes the Medicaid program especially attractive, however, is its ability to cover long-term nursing home care costs and many home health care costs — things not covered by Medicare. Imagine working, saving and investing over a lifetime, only to see your wealth quickly wiped out by the costs of long-term care — assets that otherwise could provide a meaningful legacy to your family.
Strategies to meet income requirements
Given both the cost and growing need for long-term care, Medicaid has become a highly prized benefit, providing coverage for long-term nursing care as well as many home health services. But the current income limit for Medicaid waivers in most (but not all) states is $2,382/month ($28,584 per year) per individual.
If your income exceeds your state’s Medicaid eligibility threshold, there are two commonly used trusts that can be used to divert excess income in order to maintain your program eligibility:
- Qualified Income Trusts (QITs): Also known as a “Miller trust,” this is an irrevocable trust into which your income is deposited and subsequently controlled by a trustee whom you select. There are very tight restrictions on what the income placed in the trust can be used for (e.g., both a personal and if applicable a spousal “needs allowance,” as well as any medical care costs, including the cost of private health insurance premiums). But because the funds are legally owned by the trust (rather than you individually), they no longer count against your Medicaid income eligibility.
- Pooled Income Trusts: Similar to QITs, these are irrevocable trusts into which your “surplus income” can be diverted to maintain Medicaid eligibility. In order to take advantage of a pooled income trust, however, you must qualify as disabled. Your income is pooled together with the income of others, and managed by a non-profit charitable organization that acts as trustee and makes monthly disbursements to pay expenses on behalf of the individuals for whom the trust was created. Any funds remaining in the trust upon your death are then used to help other disabled persons in the trust.
Essentially, these income trusts are specifically designed to create a legal pathway to Medicaid eligibility for those with too much income to qualify for assistance, but not enough wealth to pay for the rising cost of much-needed care.
Strategies to meet asset requirements
Like income limitations, the Medicaid “asset test” is complicated and varies from state to state. Generally, your home’s value (up to a maximum amount) is exempt as long as you still live there or intend to return. Beyond that, however, most states require you to spend down other assets to around $2,000/person ($4,000/married couple) to qualify.
You could choose to simply transfer ownership of your assets to other family members. But that introduces a number of new risks — from losing those assets as a result of that person getting divorced, experiencing a bankruptcy/lawsuit, or dying before you. Plus, you’re relying on that individual to be both trustworthy and financially prudent. And it’s not as simple as it sounds, considering Medicaid’s five-year look-back period (more on that in a bit).
Alternatively, you may want to consider:
- Asset Protection Trusts: You can transfer most or all of your assets to a trust which, if properly designed, removes those assets from your estate. Often referred to as “Medicaid Trusts,” these asset protection structures can help you not only to qualify for Medicaid benefits, but also protects your assets from other potential creditors. If income-generating assets (like stocks and bonds) are placed in the trust, you can choose to still receive the income from those assets. You can even transfer your home to the trust and retain the right to live in it for the duration of your life. Then, upon your death, the assets will be distributed to your beneficiaries according to the trust documents. What’s more, beneficiaries will enjoy a “step up” in basis on any trust assets when they receive them — avoiding capital gains on the increase in value accrued during your life.
- Spousal Transfers and Refusals: Medicaid laws permit the transfer of assets between spouses — without being subject to the five-year look-back period or any penalties. Married couples, therefore, can transfer any assets in the name of the spouse who needs care to the other spouse. A few states (e.g., New York and Florida) even permit something called “spousal refusal” — where the healthy spouse can legally refuse to provide support for the spouse needing care, making them immediately eligible for Medicaid services. While Medicaid does have a right to request that a healthy spouse financially contribute to a spouse who’s receiving care, they sometimes opt not to go through the required legal action to seek payment. Even if they do, they’re generally willing to significantly discount the cost of services. So this could prove an effective strategy.
One other option you might want to consider for reducing your “countable assets” is the establishment of an irrevocable funeral trust, which allows both you and your spouse to prepay funeral and burial expenses. Some very wealthy couples even opt to pursue a Medicaid Divorce, where the couple legally divorces solely for the purposes of protecting their assets for the healthy spouse.
Why planning well in advance matters
It’s never too late to begin creating a health care plan. But like all planning, the more time you have, the more flexibility you’ll have and the easier it will be. Medicare employs a five-year look-back period when investigating an applicant’s finances.
Transfers of certain assets made less than five years before you require home care or enter a nursing home or assisting living facility may be disallowed. This means, for Medicaid purposes, you’ll still be deemed to own them and required to spend them down before qualifying for program coverage. And transfers to a trust — just like transfers to individuals — are still subject to this look-back period.
Keep in mind that Medicaid gives you little to no choice regarding where you receive care. Only facilities with Medicaid-approved beds can accept you, and your ability to remain in your own home when receiving care decreases, since many states only cover limited home health care services through their Medicaid programs. So it’s a good idea to sit down with your financial adviser to carefully explore your various long-term care insurance options before deciding on a strategy.
Thirty states and the District of Columbia offer state tax incentives to residents who purchase long-term care insurance policies. And almost all states participate in the long-term care partnership program, which allows people who’ve purchased long-term care insurance to qualify for Medicaid while preserving some of their assets rather than spending them down.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.
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