Planning for Medicaid Long-Term Care Benefits
Medicaid is a government program that pays medical costs, including long-term care costs for nursing home care. Not to be confused with Medi-care, which is available to all seniors and does not cover long-term care, Medi-caid has strict financial and eligibility requirements. The rules are complex and change frequently, requiring great care when planning and applying for benefits.
Basic Eligibility Requirements
In most states, including Idaho and Washington, an individual applying for Medicaid long term care may only own $2,000 in total countable assets. Certain assets such as a residence or a vehicle may not be “countable” for eligibility purposes, but Medicaid may be able to place a lien on these assets after the recipient dies. If the individual is married, the healthy spouse may be able to keep up to $120,900 in countable assets. But any excess countable assets would need to be spent before the individual would qualify; this is often referred to as a Medicaid “spend down.”
Gifts, “Look-Back” Periods, and Penalty Periods
To preserve assets and avoid having to go through a Medicaid spend down, individuals will often give away assets such as homes or bank accounts to their children or family members. As might be expected, Medicaid regulates these types of gifting strategies. Medicaid will look back five years from the date of application (the “look-back period”) for any uncompensated transfers or gifts. Gifts made during this period will result in a period of ineligibility for the applicant (“the penalty period”), the length of which is calculated based on the value of the gift. Note: There are exceptions for gifts of certain assets to individuals such as a disabled child or caretaker child who lived in the applicant’s home for at least two years.
When to Plan for Medicaid
Most people start planning for Medicaid only when they think they need benefits. Because of the five-year look-back period, that’s a big mistake. The best time to plan for Medicaid is at least five years before you anticipate having to go into a nursing home or assisted living facility. However, if an unexpected illness arises, there are usually better options than doing a complete Medicaid spend-down, and it still may be possible to preserve a significant portion of your assets using more advanced planning strategies not discussed in this article.
Using Irrevocable Trusts
As mentioned earlier, individuals planning for Medicaid benefits will often make gifts to family members. Gifts can either be made directly to individuals as “outright” gifts, or they can be made to an irrevocable trust for their benefit. There are usually significant advantages to using an irrevocable trust rather than outright gifts. Some advantages of irrevocable trusts include:
- Asset Protection for Beneficiaries – Using a trust, it is possible to insulate the gifted assets from creditors of the beneficiary. For instance, if a child is sued, files for bankruptcy, or goes through a divorce, assets held in trust can be fully protected from the child’s creditors or ex-spouse.
- Preserving the Exclusion of Capital Gains on the Sale of the Home – For homeowners, Section 121 of the Tax Code excludes up to $250,000 of capital gains from being taxed when the taxpayer’s principal residence is sold. This valuable tax benefit may be forfeited if the home is gifted outright.
- Preserving Tax Basis “Step Up” – Tax “basis” refers to the owner’s original value in an appreciating asset and is used to calculate capital gains tax owed when the asset is sold. When an asset passes at the owner’s death, the recipient gets a “step up” in tax basis to the current fair market value. Gifts made during the owner’s lifetime, however, do not receive a step up. For example, if Dad purchased property for $20,000 and the property was worth $100,000 when he died and left it to Son, Son’s new tax basis is “stepped up” to $100,000, and $80,000 of taxable gains are eliminated. Conversely, if Dad gifted the property to Son during his lifetime, Son keeps the original tax basis of $20,000 and could owe a hefty tax when the property is sold. Carefully drafted irrevocable trusts can preserve the “step up” at the owner’s death, even though the asset was gifted to the trust during the owner’s lifetime.
- Determining Lifetime, Death, and Successor Beneficiaries – Trusts make it possible to name both lifetime beneficiaries and beneficiaries entitled to receive assets at your death. You can also differentiate between beneficiaries of income generated by trust assets and beneficiaries of the principal amount. Finally, you can name successor beneficiaries to any beneficiary who predeceases you or dies before the trust is used up. This can be very important for those who want assets to remain in the family.
- Incentivizing Use of Trust Assets – With an irrevocable trust you can place limits and incentives on how assets are to be used. For instance, you may specify that funds can only be used for specific purposes such as education, health, or living expenses, or for special occasions such as graduation, marriage, or the purchase of a home. Trusts can also provide important incentives and protections for individuals struggling with addiction.
- Protecting Beneficiaries with Disabilities or Special Needs – Giving an outright bequest to individuals receiving means-based government assistance such as Medicaid or SSI can cause them to lose these benefits and can be disastrous. With a trust it is possible retain shares in a “Supplemental Needs Trust,” which is designed to give beneficiaries use of their funds without interfering with their government assistance.
The use of irrevocable trusts can result in significant tax savings and asset preservation for beneficiaries and can give individuals greater control and flexibility in planning for long term care. Every person’s situation is different, and trusts are one of many Medicaid planning strategies that may be available to you. When considering Medicaid planning, it is important to work with professionals who have experience in this complex area of the law.
Crandall Law Group offers free initial consultations for our Medicaid planning.
by Ryan J. Crandall, J.D., Crandall Law Group
Ryan Crandall is an attorney and estate planner with a passion for helping individuals and families prepare for the future. Ryan believes that one of a lawyer’s primary roles is to be an educator and counselor. At Crandall Law Group, he works hard to discover his clients’ goals and explain, in easy to understand terms, the strategies that can be used to accomplish their objectives.