A common goal in estate planning, especially for people who are retired or who have a chronic illness, is protection of assets in case they need long-term care. It's common knowledge that qualification for Medicaid benefits usually requires the recipient to be impoverished. It is less common knowledge, however, that you can protect many of your assets and still qualify for Medicaid if you plan ahead.
You can watch a video of Riley and Laurel discussing these issues HERE.
Before we discuss how planning ahead helps you qualify for Medicaid without losing everything you have, let's first clarify how eligibility for Medicaid is typically determined.
- If you are single, you can only have $2,000 dollars in assets, including the value of your home.
- If you are married, you can have $3,000 dollars in assets. This does not include the value of your home (up to $595,000 in equity for 2020), so long as one spouse continues to live there.
- If you are married and one spouse does not need long-term care, that spouse can keep half of your assets, or $25,728 at minimum and up to a maximum of $128,640 (for 2020).
- The value of your IRAs, and your spouse's IRAs, count against you.
- You can't have more than $2,349 in income.
- If you are married, your spouse can have at least $3,216 in income, even if they need to "borrow" some from you to help them get to that number.
If you fail to meet either test, then you won't qualify for Medicaid until you "spend down" your assets to those numbers.
What about the "look back" period?
Yes, there's a potential trap. If you give away any of your assets - like money, real estate, or business interests - within 60 months (5 years) of applying for Medicaid, then you will be penalized for that transfer. How is this penalty calculated? For 2020, the penalty divisor is $178.18 per day.
What does that mean? Here's an example. Let's say thought transferring your home to your children was a good way to protect it from a spend down. At that time of transfer, the home was worth $120,000. A year later, you need to move into a nursing home. You penalty is $120,000 divided by $178.18, which is 673. That means you have a penalty period of 673 days (or 1 year, 11 months, and 4 days) during which you must self-pay for long-term care before you are eligible to receive Medicaid.
The Wrong Solution
Many people ask why they can't just transfer their assets to their children, assuming they can do so outside of the 5 year look-back period. It's a great question, but this solution comes with a couple of risks that people usually want to avoid.
First, transferring certain types of property, such as real estate or other assets that increase in value over time, can subject your children to an unintended capital gains tax liability. If your children are given your assets, or if they purchase them for less than fair market value, that will eventually pay taxes on the increase in value since the time that you acquired those assets. If your children inherit those assets at your death, however, they avoid the capital gains issues.
Second, transferring your assets to your children risks losing your assets through your children's bad choices or bad luck. If one of them experiences a divorce, a crisis in their own health, a bankruptcy, a lawsuit, a creditor claim, or any number of other financial problems, you could lose your savings, your home, your business, or other assets you have transferred to your children thinking you were protecting them.
Okay, so now you have a little bit of a grasp on qualifying without a plan. What if you want to plan ahead for Medicaid eligibility without losing your savings, hour real estate, your business interest, your IRAs, and other valuable assets?
Medicaid Asset Protection Trust
The Medicaid eligibility requirements stay the same. We can't change the asset test or the income test, but we can be smart about how we meet those tests. Instead of spending down your assets or transferring them to family 5 years ahead of time, which creates the tax and asset protection problems described above, we create a specific type of trust that we call a Medicaid Asset Protection Trust or MAPT.
An MAPT is an irrevocable trust that owns your protected assets in a way that is countable by Medicaid. The assets held in the MAPT are not considered when determining your eligibility, which means your non-qualified savings, your real estate, the family farm, your business interests, and other assets stay with you and your family during your incapacity.
Transfers to the MAPT are still subject to the 5 year look-back rules, so it's important to create this trust ahead of time, before you need long-term care.
An important final note: A revocable living trust does ineffective at protecting assets for Medicaid eligibility purposes. There are many great reasons to create a revocable living trust, but Medicaid qualification isn't one of them. If you have been told that your revocable living trust will protect your assets if you or your spouse need long-term care, you have been misled, and you need to solve that problem quickly.
Here's the stuff we always put at the end: If you want to know more, we would love to talk with you. Best part, the conversation about how it could benefit you doesn't cost anything. Call us at (918) 770-8940, send an email to email@example.com, or click HERE to schedule a free consultation with a Tallgrass attorney.
Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. It is always best to speak with an attorney about your questions, assets, concerns, and needs.