Medicaid Planning is a Highly Complex and Specialized Field
Nursing home costs run well into the six figures per year. Naturally, many of our clients wonder if there is a way to have the government pick up the tab.
The answer is…well sort of, maybe. But so called Medicaid planning is a veritable mine field of complexities.
Let me start off with, you can’t even venture down this “Medicaid planning” road without an attorney. It is extremely complex and the costs of getting it wrong can be huge. As they say in the commercials - Do not attempt to do this on your own.
In essence, Medicaid is a program intended to pay medical costs for the poor. There is a specific definition of “poor” which applies to long term care, which is different than the definition of “poor” for regular medical care. In short, to qualify for Medicaid to pay for long term care, you can’t have any more than a couple thousand dollars in your name. If you have a healthy spouse, she can retain a modest sum of assets for her own well being, but it is modest indeed! He / she may also continue living in the home. Furthermore, any and all income you may receive has to go toward paying for your care – if you qualify, Medicaid will pay the rest. Again, a healthy spouse may be able to keep some income for herself within limits.
The usual path, without planning, is that individuals pay for their own needs, and Medicaid will come to the rescue if and when the individual runs out of money. Of course, the downside of this approach is that you (and your heirs) end up with nothing. And if you have a healthy spouse, particularly one who is relatively young, his or her financial security may be ruined.
Medicaid planning involves the strategic gifting away of resources such that they may be available to heirs or a healthy spouse in the future. Essentially you intentionally impoverish yourself in order to qualify for Medicaid.
If it sounds like a good idea to you, let me caution you again – this is messy work. I have taken coursework on the topic and it always makes my brain spin. The first (but far from the only) complication is that gifting of assets disqualifies you from receiving benefits for a period of time. Medicaid can and will (diligently) comb through your financial records for the past 5 years to find potential “gift” transactions. The exact impact of gifting on Medicaid is too complicated to get into here and largely misunderstood by the public. The main point is that you have to plan far in advance of your care need to effectively use a gifting strategy.
There are other tools available to Medicaid planners as well. Certain annuities (very select ones…) can be used to turn assets into income streams which may survive the patient, and therefore provide security to a healthy spouse. Simple steps like using financial assets to pay down a mortgage make sense, since Medicaid will generally let the patient and his/her spouse retain a primary residence. (although they will usually place a lien against it to recover expenses after death). I’ve even had clients who moved to another state with more favorable Medicaid laws, after the husband was diagnosed with a degenerative disease that they knew would make the need for nursing care likely down the road.
There are a few problems with Medicaid planning as a financial planning tool however.
One is the ethics of it. It is one thing to try qualifying for benefits in order to protect the financial security of a healthy spouse. It is another thing altogether for a wealthy individual to try to qualify for government benefits when he/she can easily afford to pay the bills on their own.
Then there are practical questions. Since you need to plan so far in advance, how much of your wealth should you give away? And how will you give away assets that are in an IRA or other retirement account. These can’t generally be transferred to a trust without first withdrawing the assets and paying tax on the proceeds. What about taxes (trusts are highly inefficient from a tax point of view). And generally, how will arrange for your own financial needs, and those of your spouse, once you no longer have control over your money?
Lastly, even though an attorney is essential for effective Medicaid planning, you need to be very careful which attorney you choose. I would also strongly advise involving your financial planner in any planning sessions. Many elder care attorneys (in my experience) operate like “trust mills” – recommending and cranking out cookie-cutter trust and estate documents without really taking the time to understand the clients finances and goals. Some even sell annuities for commission (and I though fee only was only a financial advisor thing!) Finding the right Medicaid attorney is very important. We can make some recommendations.