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ESTATE PLANNING ISSUES 2:
Is Medicaid Planning Legal?
Of all couples over age 65, at least 70% will need nursing home care for one of the spouses. Unfortunately, many couples wrongly believe that the transfer of their assets to their revocable Living Trust will protect them from Medicaid recovery. Even with a revocable trust, the cost of nursing home care, sometimes exceeding $50,000 per year, can quickly deplete the savings of the average senior.
Revocable trusts are an important planning technique for minimizing the costs and time delays of probate administration and for providing continuity of management in case of disability, as well as, in many cases, minimizing estate taxation. Congress makes the rules of estate taxation and advisors help their clients utilize these rules to their clients’ advantage. Everyone accepts the fact that estate tax planning is perfectly legal, as long as the techniques utilized are not abusive. The goal of such estate tax planning is to completely avoid estate tax when the first spouse dies, and after the death of the second spouse, when estate taxes may be due, to pass the maximum legal amount to the client’s children or other beneficiaries in order to “keep it in the family”.
Similarly, the goal of Medicaid planning is to avoid spousal impoverishment and the depletion of the inheritance that would pass to the children. In 1988, the United States Congress passed the Spousal Impoverishment Act, which together with the Omnibus Budget Reconciliation Act of 1993, provide the legal means to qualify for Medicaid nursing home care without completely “going broke”.
The difference between tax planning and Medicaid planning is that tax planning involves one body of federal tax law, which does not vary from state to state. However, since the states pay 50% of Medicaid benefits, each state enacts their own rules to administer the program. Thus, a client may qualify for Medicaid under the Florida rules by investing in certain acceptable types of annuities, but then be moved by their child to their child’s northern state and find they are ineligible for Medicaid, but have no available assets to pay their nursing home costs.
It is perfectly legal and ethical to plan to protect assets from erosion due to nursing home costs, as long as the federal and state rules are followed. Although Florida’s rules are fairer than most states, the rules are so complicated that they require the counsel of an elder law attorney. Strategies differ for a married couple and an unmarried nursing home resident. With a married couple, one spouse will reside in a nursing home (called the “institutional spouse”) and the other spouse will continue to reside in the residence (called the well spouse or the “community spouse”). There are limits on what assets the couple is permitted to keep, called “exempt” assets, which includes a residence, car, burial plots, etc, together with a cash reserve of $84,120 this year. Although for some couples this amount may seem large, for most retired couples this amount is far less than their net worth. A spouse has a legal obligation of support even if it is a recent short-term marriage and even if they have “pre-nuptial” agreement. A single person’s cash reserve is limited to only $2,000.
All other assets are either “countable” assets, which disqualify the client from Medicaid nursing home benefits, or they are “unavailable” assets, which do not disqualify one from such benefits. For example, “unavailable” assets such as a spousal IRA or Limited Partnership unit or certain annuity investments may be able to be kept, while still qualifying for Medicaid nursing care. It is not illegal to reposition a client’s assets for good investment planning, which may also lead to Medicaid qualification, again as long as the rules are followed.
Although it is dangerous to make generalizations, many deferred annuities are sold to elderly persons because of large commissions, rather than for good investment reasons. It is generally inappropriate to sell an 80-year-old person in a 15% tax bracket a deferred annuity at a low interest rate that carries a surrender charge for the next seven years. When the children inherit the principal, they will most likely be in a higher tax bracket, and, without the stepped up basis, will pay tax at ordinary income tax rates on all of the deferred income. These are being purchased from the misplaced fear of protection form nursing home costs and often with the discouragement of purchasing valuable long term care insurance. Individuals should consult their financial advisor before purchasing a deferred annuity after retirement.
If an individual has three years of nursing home insurance they, or their power of attorney holder, can legally give away their wealth to their children more than three years before application for Medicaid. Only as a last resort should that certain kind of Medicaid annuity be considered. But as a last resort, it may save much of the couple’s net worth from the feared nursing home “spend-down”. It may also preserve the single nursing home resident’s estate for their children, all perfectly legal if you follow the rules.
With proper Medicaid planning, a client can protect a large portion of their net worth from the erosion of the almost inevitable nursing home costs.
William Edy
Attorney/CFP
Read More:
ESTATE PLANNING ISSUES 1 | ESTATE PLANNING ISSUES 2 | ESTATE PLANNING ISSUES 3
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