There is a common misconception that Medicaid is only for poor, low-income seniors. But the reality is, with a little thoughtful and proper estate planning, anyone except the wealthy can often qualify for the benefits of the program.
In 1965, Congress created the Medicare program to improve insurance coverage and provide greater financial solvency for seniors, regardless of income, current health, or medical history. At the same time, they set the parameters for Medicaid, a state-run, means-based program intended to provide additional coverage to low-income and disabled individuals and families.
Unlike Medicare, however, Medicaid is not a federally administered program. Operating under broad federal guidelines, each state decides its own Medicaid eligibility criteria, eligible coverage groups, services covered, administrative and operational procedures, and payment levels.
However, what makes the Medicaid program particularly attractive is its ability to cover the costs of long-term nursing home care and many home health care costs – things that are not covered by Medicare. Imagine working, saving and investing a lifetime, only to see your wealth quickly wiped out by the costs of long-term care – assets that could otherwise leave a meaningful legacy for your family.
With both the cost and the growing need for long-term care, Medicaid has become a popular 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 to maintain your eligibility for the program:
- Qualifying Income Trusts (FAQs): Also known as the “Miller Trust”, this is an irrevocable trust in which your income is deposited and subsequently controlled by a trustee of your choice. There are very strict restrictions on the use of income placed in the trust (for example, a personal ‘needs allowance’ and, where applicable, a spouse’s allowance, as well as all medical costs, including cost of private health insurance premiums). But since the funds legally belong to the trust (rather than you individually), they no longer count toward your Medicaid income eligibility.
- Pooled Income Trusts: Similar to ITQs, these are irrevocable trusts into which your “excess income” can be diverted to maintain Medicaid eligibility. However, to take advantage of a joint income trust, you must be considered disabled. Your income is pooled with the income of others and managed by a nonprofit charity that acts as a trustee and makes monthly disbursements to pay expenses on behalf of the people for whom the trust was created. Any funds remaining in the trust upon your death are then used to help other people with disabilities in the trust.
Essentially, these income trusts are specifically designed to create a legal pathway to Medicaid eligibility for those who have too much income to qualify for assistance, but not enough wealth to pay the rising cost of much-needed care.
Like income limitations, Medicaid’s “asset test” is complicated and varies from state to state. Typically, the value of your home (up to a maximum amount) is exempt as long as you live there or intend to return. Beyond that, however, most states require you to spend other assets at around $ 2,000 / person ($ 4,000 / married couple) to qualify.
You can choose to simply transfer ownership of your assets to other family members. But it introduces a number of new risks – of losing those assets as a result of that person’s divorce, going into bankruptcy or going to court, or dying before you do. In addition, you are relying on that person to be both trustworthy and financially prudent. And it’s not as straightforward as it sounds, given Medicaid’s five-year look back (we’ll get to that a bit later).
Alternatively, you can consider:
- Asset protection trusts: You can transfer most or all of your assets to a trust that, if properly designed, removes those assets from your estate. Often referred to as “Medicaid Trusts,” these asset protection structures can help you not only qualify for Medicaid benefits, but also protect your assets from other potential creditors. If income-generating assets (such as stocks and bonds) are placed in the trust, you can choose to continue to receive income from those assets. You can even transfer your home to the trust and retain the right to live there for the duration of your life. Then, upon your death, the assets will be distributed to your beneficiaries according to the trust documents. In addition, beneficiaries will benefit from a basic “laddering” over all assets in the trust when they receive them, thus avoiding capital gains on the increase in value accumulated over your lifetime.
- Transfers and refusals between spouses: Medicaid laws allow the transfer of assets between spouses – without being subject to the five-year look-back period or any penalty. Married couples can therefore transfer any assets in the name of the spouse who needs care to the other spouse. A few states (eg, New York and Florida) even allow something called “spousal denial” – where the healthy spouse can legally refuse to provide support to the spouse in need of care, making them immediately eligible for care. Medicaid services. Although Medicaid has the right to request that a healthy spouse make a financial contribution to a spouse in care, it sometimes chooses not to take the legal action required to seek payment. Even if they do, they are generally willing to significantly reduce the cost of the services. This could therefore prove to be an effective strategy.
Another option you might consider to reduce your “book assets” is to create an irrevocable funeral trust, which allows you and your spouse to prepay burial and burial costs. Some very wealthy couples even choose to pursue a Medicaid Divorce, when the couple legally divorce for the sole purpose of protecting their property for the healthy spouse.
It’s never too late to start creating a healthcare plan. But as with any planning, the more time you have, the more flexibility you have and the easier it will be. Medicare uses a five-year retrospective period to investigate a claimant’s finances.
Transfers of certain assets made less than five years before you needed home care or entered a nursing home or assisted living facility may be refused. This means that for Medicaid purposes, you will still be considered the owner and required to spend them before you can qualify for program coverage. And transfers to a trust, like transfers to individuals, are always subject to this retrospective period.
Keep in mind that Medicaid gives you little or no choice about where you receive care. Only facilities with Medicaid-approved beds can accept you, and your ability to stay at home when receiving care declines, as many states only cover limited home health services through their Medicaid programs. It is therefore a good idea to sit down with your financial advisor to carefully consider your different long term care insurance options before deciding on a strategy.
Thirty states and the District of Columbia offer 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 with long-term care insurance to qualify for Medicaid while preserving some of their assets rather than spending them.