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Retired Investor

Common Questions About Medicaid and Medicaid Planning

Estate planning and gifting strategies can be used to preserve assets, while still allowing a person to maintain eligibility for Medicaid.

by John Horn, Dera Johnsen-Tracy | May 2017

Medicaid is a needs-based medical assistance program administered by federal and state governments. It provides a wide range of medical services to the aged and disabled. You cannot exceed certain income and resource limits if you wish to qualify for Medicaid; you will probably need to “spend down” your assets until you reach required minimums before you are eligible.

State and federal governments continue to tinker with Medicaid eligibility and spend-down rules. Planning opportunities are currently available (even though a spouse may already be in a nursing home) that may not be available in the future. Even better planning opportunities exist if neither spouse is in a skilled care facility.

What Kind of Restrictions Can Medicaid Put on My Assets?

Medicaid will take a large portion of your assets in return for paying your skilled care costs. The amount left to you for personal expenses is called a “countable resource allowance.” It is based on your “countable resources,” which generally include all of your assets except the following:

  • Your residence (if you have a non-disabled spouse or you plan to return to your residence from the nursing home);
  • A motor vehicle, within certain parameters;
  • Personal effects and household goods, within certain parameters;
  • Life insurance, within severe parameters;
  • Property used in an operating business or trade;
  • A community spouse’s retirement funds;
  • Non-home real property listed for sale;
  • Non-home real property jointly owned with another (exempt when the other owner refuses to sell or a sale would cause “undue hardship” to the other owner);
  • Funds received to replace lost, damaged or stolen excluded resources; and
  • Burial spaces and arrangements.

Note that the above exceptions may not apply in every state. In most states, the individual countable resource allowance is $2,000. The countable resource allowance for the community spouse (i.e., the spouse who is not in a skilled care facility) is generally somewhere between $50,000 and $120,000 depending on the amount of countable assets owned by husband and/or wife. Countable assets over this amount usually must be spent before the disabled spouse is eligible for Medicaid.

What About Medicare? Won’t Medicare Help?

Many people mistakenly believe that Medicare will cover the cost of a nursing home stay. In fact, Medicare pays less than 5% of nursing home costs. Furthermore, Medicare only provides coverage for skilled care, with up to 100 nursing home bed days available. Additionally, Medicare does not provide any coverage for the most common type of nursing home care, which is defined as “custodial care.”

What Does Medicaid Cover? What Does It Not Cover?

Medicaid coverage includes the following:

  • Inpatient and outpatient hospital services and clinic services,
  • Skilled and intermediate nursing home services and physicians’ charges,
  • Physical rehabilitation, and
  • Psychiatric care.

Medicaid also covers the cost of drugs, medical supplies, tests and X-rays, prosthetic devices, dialysis and transportation. Medicare supplemental insurance plans may have some gaps; Medicaid covers virtually all of them. Medicaid may also pay for deductibles and co-pays of Medicare Part A and Part B. Under Medicaid, most medically necessary services (including nursing home care) have no maximum stays.

Medicaid does not cover some personal expenses, such as haircuts, beauty shop charges and clothing. However, once an individual is qualified for Medicaid, he or she may retain a portion of his or her monthly income to meet these expenditures. This allocation is defined as a “monthly personal needs benefit.” The monthly personal needs benefit is generally around $65.

My Wife and I Are in Good Health, and We Have a Good Estate Plan. Why Do We Need This?

It’s hard to ignore the implications of increasing long-term care costs and longer life spans. A 2003 study conducted by the Agency for Health Care Policy and Research projected that 43% of Americans who reach age 65 or older will spend time in a nursing home; 24% of the same group will spend at least one year. A 2003 congressional survey stated that 70% of single residents reached the poverty level (countable assets less than $2,000) after spending only 13 weeks in a nursing home, while 50% of couples, with one spouse in a nursing home, reached the same poverty level within only six months.

How do you best finance a long-term nursing home stay? When you consider (1) the likelihood of a nursing home stay; (2) the annual cost of a nursing home stay, which ranges nationally between $50,000 to well over $100,000; and (3) the many regulations that can make it difficult to preserve assets while making the disabled spouse eligible for Medicaid, it should be clear that some planning is necessary for every family.

Over and over again, we have seen instances where prior planning would have preserved assets, while permitting the full use of government benefits to cover long-term health care costs. Alternative means still remain available to protect assets. Your assets may be protected if you plan.

What Estate Planning Options Are Available?

Medicaid planning involves the development of a strategy to preserve your assets to the maximum extent possible. All plans are different because all individuals and families have different assets and different needs. There are many options available to you to preserve assets and still become eligible for Medicaid. Depending on the laws of your state of residence, some of these strategies might include the following:

  • Some forms of gifting;
  • Converting countable assets to non-countable assets;
  • Making capital expenditures on non-countable assets;
  • Life estates; and
  • Irrevocable trusts, including Medicaid asset protection trusts.

An estate planning attorney can help identify the strategies that are best for you and your family.

What Is a Medicaid Asset Protection Trust?

A Medicaid asset protection trust can be a highly effective estate planning tool, allowing an individual or a couple to transfer some of their assets into a trust to hold and manage these assets during their lifetimes. Upon death, the remainder can be distributed to designated beneficiaries in accordance with the provisions of the trust.

In order for the assets transferred to a Medicaid asset protection trust to qualify as non-countable for Medicaid qualification purposes, and subject to state-specific rules, the trust must meet certain requirements:

  • The trust must be irrevocable;
  • The trust must name someone other than you or your spouse as the trustee, typically an adult child or children;
  • The trust must limit your access to income only;
  • The principal of the trust must be unavailable to you; and
  • The trust is subject to a “look-back period” of up to several years. This means that the assets transferred to the trust are not protected until the required number of years have passed since the date of transfer. (The number of years for this look-back period varies from state to state, but is typically either three years (e.g., New Mexico) or five years (e.g., Wisconsin.)

A Medicaid asset protection trust is not an appropriate planning strategy for everyone. For many people, the loss of control and the loss of access to the value of their assets do not justify the end result of protecting these assets, ultimately for the benefit of their children. Further, for those who do not wish to limit themselves in old age only to the care available to Medicaid recipients, exploring long-term care insurance options might be a better and more flexible approach than intentional Medicaid qualification.

However, in certain circumstances, and provided a person is willing to divest his or her assets to an irrevocable Medicaid asset protection trust, this type of trust can prove quite effective. For example, when the asset the person wishes to protect is real estate being used as his or her home, the Medicaid asset protection trust can include provisions allowing the person to continue residing in the home for his or her lifetime without paying rent. If the person wishes to downsize at some time in the future, the trustee of the trust can sell the real estate and purchase a smaller residence in the name of the trust. Provided he or she is past the look-back period, then when he or she is admitted to a nursing home, the real estate is considered a non-countable asset—even if the person does not plan to return home. The trustee is free to sell the real estate and invest the net sale proceeds. Upon the individual’s death, the assets remaining in the trust can be distributed outside of probate directly to the designated beneficiaries with no payback requirement. Similarly, this approach can work well for family farms, allowing the person to use the income from the farming operation for his or her lifetime while preserving the value of the real estate in the event that he or she ends up in a nursing home at some time in the future.

If you are interested in Medicaid planning, you should consult with a qualified estate planning attorney well in advance of your anticipated nursing home admission.

—by John Horn and Dera L. Johnsen-Tracy, co-founders of Horn & Johnsen SC law firm.

Discussion

Jim from WA posted over 9 years ago:

While it is legal to establish financial strategies to shield your assets from paying your own medical costs and transferring the expense on to the other taxpayers (i.e., Medicaid), neither I or my brothers or sister felt that it was morally right to shield our mother's assets for our benefit so the other taxpayers could pick up the cost of her care. I wish this type of discussion would have been included in the article and how the cost of Medicaid impacts the federal deficit.


David Powell from IN posted over 9 years ago:

I agree with you, Jim. Trying to shift responsibility for one's own care to other taxpayers if there are other options causes moral concern for me too. Up to this point, only long term care insurance seems like a possibility to me (a very expensive option). I also would appreciate a discussion of other possible option.


Henry Mckenna from NY posted over 9 years ago:

I've sold LTC Ins. and it amazes me that most people would rather let someone else pay for there Nursing Home Bill. Shifting assets, to avoid paying a LTC policy premium ,makes me think, the good Americans, died on the Beaches of France, the hills of Korea,the jungles of Vietnam, or Iraq. Excuse my spelling).


btlRickas from IL posted over 9 years ago:

Henry - I've had LTC Ins for 30 years. When I bought it back then I was assured the premium would never rise or benefits ever decrease. That ended 3 years ago when the insurance Co. went to the State Ins. Commission to request a rate hike. That was granted and so now there has been a hike each year since. Maybe that's part of the problem selling these policies. What happened to the good Insurance Companies that stood by their policies?


Mark Wynn from MD posted over 9 years ago:

I strongly agree with fellow AAII members who question the ethics of pushing the burden of caring for family members onto taxpayers if they are able to provide for their families. Also, consider the issue of which nursing homes and long term care facilities will take elderly disabled patients who only have Medicaid coverage. Unfortunately, many of these facilities don't have the resources to provide a high quality of care. If my loved ones need long term care, I would far rather spend extra money to assure that they are able to be cared for in a high quality facility rather than only the cheapest.


ZanzibarBukBukMcFate from NJ posted over 9 years ago:

"70% of single residents reached the poverty level (countable assets less than $2,000) after spending only 13 weeks in a nursing home, while 50% of couples, with one spouse in a nursing home, reached the same poverty level within only six months" So a middle income person and/or their spouse who has worked hard and saved diligently all of their working lives, sacrificing to attain the (supposed) American Dream, investing as wisely and possible saving for the sake of their posterity - that it's only fair that they should burden the full cost of care and be forced into destitution - in less than six months - just because they happen to become old and sick - while corporations and individuals of greater means routinely stack the deck and use every trick in the book to grow and preserve their holdings. How is that fair? I think we should instead question the ethics not of the individual, but of a larger societal system that is set up to allow such a thing to happen to its elders. Until a fundamental societal change occurs, then I see nothing unethical about taking advantages of the rules of the game, because it is nothing more than that - a game.


Michael Olah from OH posted over 9 years ago:

Jim: I feel compelled to weigh in. You see this as "shifting" the burden from your mother to "other" taxpayers, but you ignore the fact that she's been paying taxes supporting the system for years - and now she is entitled to a return on that "investment." While Medicaid isn't an "insurance" program like Social Security and Medicare, it is a system of a "working" generation supporting those who paved the way for them to succeed. In addition, "working stiffs" have very, very little opportunities to engage in tax planning and asset retention - where opportunities abound for the well heeled. This is one small bone to preserve and perhaps assist the progeny of the middle class to bootstrap themselves to a better life through a rather meager inheritance. I see nothing "immoral" about it, at least and until our tax system is revamped to favor the masses in the middle and not the minority at the top (which is the true immorality of the system)


ZanzibarBukBukMcFate from NJ posted over 9 years ago:

thinking further on the topic of immorality, i would raise two questions 1. The government rules allow for certain tax deductions. When reconciling on April 15, do you not take advantage, or do you leave that money on the table because you think it's unethical? 2. Did your mom and dad live high on the hog? did they spend all of their money on fancy cars, vacations, and other ephemeral things, or did they get educated, work hard and sacrifice and save for their future lives and for the benefit of their children? Yet you argue that we should force people like this to spend down all of their accumulated wealth over a lifetime, effectively pushing them into destitution for the sake of their health and well-being, while the person who didn't save a dime neither planning nor investing for their future can still take full advantage of Medicaid? How is that ethical? Again, the argument I make is that the entire system itself is flawed and ought to encourage appropriate fiscal responsibility in the first place.


Lawrence Flescher from WI posted over 8 years ago:

Often the people who argue against safety nets throw their weight into them with gusto, increasing the cost and threatening the future of the desperately needed resource. I watched a millionaire father in law place his mother-in-law in a substandard medicare facility. The money put in trust is for heirs. Fie. It is wrong.


Jeffrey Onuska from OH posted over 8 years ago:

The broader picture is how do we want our loved ones/seniors to be cared for when they cannot take care of themselves. Currently, funding for this care is substandard as anyone that has spent any amount of time in a nursing knows. Staffing levels are terrible and pay levels for staffing ridiculous. The amount of money wasted in this country for far less important matters needs to be addressed. Let's start with the elimination of SS benefits for people with a net worth over 5 million? How about a tax on CEO's making over 1 million that goes directly toward supporting nursing homes? Maybe having non-violent criminals volunteer time at LTC facilities? Same for students. Respect for the quality and dignity of life counts more than all the money.


Wendell Adams from IN posted over 8 years ago:

My mother, an RN spent her last 7 yrs in a nursing home and finally qualified for Medicaid for the last 2 months. She had LTC, and then self paid as long as she could. She did not want to be a burden on the others. But we watched many other patients come (and die) during her time, and many had lived a life of poor decisions; spending money they did not have on stuff they did not need (a bass boat for example) and never giving a hoot about their future knowing full well, that the state would take care of them. My feeling about this issue has changed; why should I be paying taxes for those folks? The laws are there for a reason and to allow fairness. If you don't take advantage of the laws you are only helping support the intentional freeloaders and cheating your heirs.


Randall Knowles from MT posted over 8 years ago:

I only recommended this strategy if there are handicapped children or a spouse. Morally I don't feel it is right to force a hard working citizen onto welfare because they failed to plan or did not have enough assets to plan. I always worry about the community spouse and their dignity.


Fred Schmidt from DC posted over 8 years ago:

One thing I'm pretty sure of - turn it over to Medicaid, and you kind of get what they give you. You surrender quite a bit of choice in your health care with this arrangement, in my experience. I agree with the sentiment that the article could have said more about that there are other ways to see this. I would tend to the view that it's not terribly moral to hide assets or transfer them to others. Some of what we might call the "pro medicaid camp" are more arguing for what is (support of the genuinely indigent) than what the authors espouse as a routine strategy. If everybody did it, think what the taxes and health care crisis would be.


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