Medicaid Planning: Look Before You Leap

by Alyssa Quintero on Thu, 2007-11-01 09:16

In February 2004, Leonard Picton of Ellicott City, Md., received a diagnosis of ALS. Immediately, Leonard, 65, and his wife, Lee, who has multiple sclerosis, went into ultra-financial-planning mode. For Lee, the question became, “Will we have enough money left to take care of me when Leonard’s gone?”

“When you get a diagnosis of ALS, you have to begin your financial planning immediately with an eye to Medicaid,” Lee says. “It’s not illegal, and it’s not unethical. Unless you’re rich, not very many people can afford the expenses involved with ALS without some kind of assistance.”

Leonard and Lee Picton met with an elder-law attorney following Leonard’s diagnosis of ALS

Leonard and Lee Picton met with an elder law attorney following Leonard’s diagnosis of ALS, and rearranged their assets for Medicaid planning purposes. Since the costs associated with ALS and long-term care are high, Lee urges couples to make financial plans to protect the surviving spouse sooner rather than later.

Following Leonard’s diagnosis, Lee began shifting assets from countable into noncountable form.

First, they bought a new house in Lee’s name, and used assets to make home modifications to meet Leonard’s needs. Based on Maryland state law, they were able to legally divert money from Leonard’s retirement account into a special account in their son’s name that’s created for the support of the spouse.

Leonard’s assets are being liquidated by the monthly spend-down amount allowed by the state, $4,300.

“I estimate that Leonard’s assets will be depleted in about three years, and if he ever has to apply for Medicaid, I can point to this account and show that it’s received deposits at the spend-down amount [for Maryland],” said Lee, who consulted with a local elder law attorney.

“I can show the paper trail and prove that the money going into the account in my son’s name was created solely for the provision of the surviving spouse.”

Their Medicaid planning “should keep us out of bankruptcy,” Lee says. “But everybody’s situation is not the same. While legal advice is expensive, it can save you a lifetime of aggravation.”

Medicaid planning 101

The golden rule in Medicaid planning is that you shouldn’t assume that what worked for someone else will work for you.

Robert Fleming, a certified elder-law attorney in Tucson, Ariz., advises, “Accept what everybody tells you about the [Medicaid] system, but don’t believe it or act on it until you meet with a professional.”

For example, Fleming urges caution when married couples are spending down assets, because they could spend down too soon.

He explains that married couples should have as much as possible available in assets at the time that Medicaid initially assesses their resources, because in most states that amount determines how much can be retained by the unaffected spouse. So, there’s a period where you’d want to maximize your assets, before beginning to spend down.

Evaluating your assets

Medicaid eligibility is based on income and personal resources, such as bank accounts, stocks and bonds, loans or any resource of value owned by an individual or jointly owned by a married couple. Earned wages, Social Security benefits, disability insurance payments, retirement incomes, pensions and alimony all count toward the income cap.

Currently, an individual receiving Medicaid can keep $2,000 in total assets and have a monthly income of $1,869.

Certain assets aren’t countable. For example, most states allow you to retain one home and one vehicle outside the asset limit.

Various exemptions and allowances are available to married couples that aren’t available to single individuals. Federal law requires states to adhere to the spousal impoverishment provision that ensures that the “community spouse” (the one still living at home) isn’t left with little or no income or resources when the other spouse goes to a nursing home.

How it works:

  • A resource assessment, or snapshot, is taken of the couple’s countable assets at the time of the ill spouse’s admission to a nursing home. This snapshot is the basis for calculating the community spouse’s share of assets, so it helps to have a large number of assets at this time.
  • From the total combined countable assets, Medicaid assigns half to the community spouse, and $2,000 of the other half to the spouse in the nursing home. The couple must deplete the excess assets by spending down.
  • The community spouse’s share is compared to the state’s minimum and maximum community spouse resource standards (2007 federal standards range from $20,328 to $101,640).

Here’s one possible scenario:

Alex goes into a nursing home and applies for Medicaid. The snapshot is made, and Alex and his wife, Michelle, have $100,000 in countable assets. The assets are divided in half, giving Michelle $50,000, while Alex is allowed to keep $2,000. The couple must spend down the remaining $48,000 from Alex’s share in order to meet Medicaid’s asset requirements.

Transferring assets is tricky business

Medicaid planning is a viable, legal option when your monthly income exceeds the income cap but isn’t enough to pay for long-term care.

Medicaid planning is a viable, legal option when your monthly income exceeds the income cap but isn’t enough to pay for long-term care. The laws are complicated and vary by state, so consulting with an elder law attorney who specializes in Medicaid can turn rocky waters into smooth sailing.

Medicaid planning is complicated, and it pays to consult an elder law attorney. Although expensive, an attorney can save money — and heartache — in the long run.

The temptation to move assets or put them in other relatives’ names is a common reaction, but can be fraught with financial danger, warns Judith Grimaldi, a certified elder-law attorney in Brooklyn, N.Y. She explains that hiding or sheltering assets isn’t a bad instinct, but it’s the method that counts.

“You have to be careful when you’re moving money. You don’t want to trip over a tax burden or make the situation any worse,” she says.

The Deficit Reduction Act of 2005 made it more difficult to transfer assets and still qualify for Medicaid.

  • The state now will “look back” five years (three years under the old law) to examine all asset transfers during that time.
  • Based on the transfer(s), the state can impose a penalty period during which you’ll be ineligible for Medicaid benefits.
  • To calculate the penalty, the state divides the transfer amount by the state’s average monthly private-pay rate for nursing home care.
  • The penalty period begins when you would otherwise become eligible for Medicaid. (Under the old law, the penalty began the month after the transfer was made.)

    For example:

    Julianne applies for Medicaid in March 2011. During the evaluation, the state finds that she gave her daughter a $50,000 gift in July 2007, making it subject to the five-year look-back period. To calculate the penalty, the state divides $50,000 by $5,000 — the state’s average monthly cost for nursing home care — and gets a 10-month penalty period. Julianne could become Medicaid-eligible in January 2012.

Planning for allowable transfers

According to the Centers for Medicare and Medicaid (CMS), certain transfers won’t hurt your Medicaid eligibility. This includes transfers to a spouse or to a third party for the sole benefit of the spouse; transfers to certain disabled individuals, or to special needs trusts established for those individuals; and transfers for a purpose other than to qualify for Medicaid.

Medicaid planning means rearranging your finances so that countable assets are legally spent or converted into noncountable assets and some assets are set aside to provide for the healthy spouse, if you’re married.

Gabriel Heiser, an elder law attorney in Boulder, Colo., who specializes in Medicaid eligibility and estate planning, cautions, “Hiding money is illegal, and there all kinds of serious fines and jail time for doing that. But, there are legitimate ways to protect assets.

“It’s not a do-it-yourself project because it’s too risky. Not only are the state rules different, but there can be regulations that are hard to find and interpret, and there are always exceptions.”

To spend and convert countable assets, you can pay off the mortgage on your family home, make home modifications and repairs, pay off your debts, purchase a car for your healthy spouse, pay for care at home and prepay burial expenses.

For example, when Alex applied for Medicaid in the fictional scenario above, he and Michelle had to spend down $48,000. Michelle used the $48,000 to pay off their mortgage, as well as other debts.

Medicaid information can be found at www.cms.gov. To find out if you’re eligible, contact your state’s Medicaid office or Department of Health Services.

The contents of the article are intended to be general information and shouldn’t be construed as legal or financial advice. To find an elder law attorney in your area, visit www.naela.org.

Alyssa Quintero
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