Basic Asset Protection
Increasingly as clients speak to me about their Wills, we migrate onto the subject of protecting their assets in the event they need nursing home or other long term care. When someone needs nursing home care or has very heavy medical expenses, that he/she cannot afford, Medicaid comes into consideration. It’s a jointly run federal and state program that provides for medical care in this situation. This article gives a broad brush explanation of Medicaid, so you can see how planning for Medicaid may impact your estate plans.
What is the Relationship Between Medicare and Medicaid?
Medicare is health insurance for individuals age 65 and over, who are entitled to Social Security retirement benefits, (or have received Social Security disability benefits for two years.) It is the primary payer of health care coverage, for those 65 plus. But it does not cover long term “custodial” care, which is what most people need with diseases like Alzheimer’s or Dementia. Non-skilled nursing home care or home health aides, not covered by Medicare, may be covered by Medicaid.
Medicaid is a jointly funded federal/state program originally designed to provide medical care to the “poor.” It may provide coverage for certain types of medical care for folks age 65 and older, when they have hefty medical expenses that Medicare doesn’t cover. Diseases like Alzheimer’s and Dementia often require care not covered by Medicare.
How Medicaid Needs Arise
Many folks learn about Medicaid only when they realize they no longer have the funds to care for themselves or a loved one. This can happen after funds are expended for home care for a long time, or when a declining person has one too many medical needs in a row. For example, with Medicare, a hospital stay is covered as well as a period of time in a nursing home or rehab facility, if the patient’s condition can be remediated or improved with the treatment. However, progress must be shown to receive Medicare coverage in a skilled facility.
Let’s say a person falls, breaks a hip, has slight dementia and then progress isn’t shown. When the permitted rehab days expire, Medicare may not provide continued stay in rehab or a skilled nursing facility. Then what? Medicare does not cover custodial care (non-skilled nursing care) in a nursing home. That’s when folks may get involved with Medicaid, because out of pocket costs begin to mount and they may not have substantial cash reserves to pay these bills.
New York uses a “spend down” approach to determine eligibility for Medicaid. This means that you are required to spend down your income and assets on health care costs, before you qualify for Medicaid. Both “income” and “assets” are subject to Medicaid fine print.
In a spend down state, like New York, a person is eligible for Medicaid once medical expenses exceed income above the base amount. To give you an idea, for 2016 an individual applicant living in the community (not in a nursing home) may keep $825/month and qualify for Medicaid. The limit for a couple is $1,209/month. Medicaid counts both earned income (from salary or wages) as well as unearned income (dividends, interest, investment income) when determining eligibility. There are some small exemptions, such as for the cost of health insurance, but most income is included. For example, IRA distributions in pay status (e.g. the required minimum distribution) count as income.
Your Assets and the “Resource” Standard
Medicaid also looks at your assets or “resources” when determining eligibility. Apart from certain exempt assets ( addressed below) you can keep very little and still qualify for Medicaid. For 2016, individuals may retain $14,850, and couples, $21,750. This means you can keep those assets and not have to spend them for medical care. This same standard applies whether you are in a nursing home or not.
Assets you give away do not count if you are applying for “community” or non-nursing home Medicaid. However, if you are applying for Medicaid for nursing home care, your “resources” include property you’ve given away during the prior 60 months. This “five year “ look-back rule is critical in asset protection planning for Medicaid. If an applicant has resources in excess of the eligibility limits, he will not be eligible for Medicaid until he incurs medical expenses equal to or greater than the excess resources.
Certain types of property are exempt from being considered “resources” for purposes of Medicaid eligibility. These include:
- A homestead exemption for an applicant’s equity in a home up to $828,000, if applicant or spouse still reside in the home.
- One automobile, personal effects (including jewelry), household furniture and appliances are exempt.
- A minimal set aside for funeral/burial arrangements.
- Special allowances are afforded if the individual is the parent of a minor who is certified blind, disabled or similar unfortunate circumstances.
If a person who’s been on Medicaid dies with resources, Medicaid may have the right to be paid back typically from probate assets. This is beyond the scope of this piece.
Planning for Medicaid/Preserving Family Assets
Clients want to know how they can keep their money and have an individual be eligible for Medicaid, if that is needed down the road. We recommend using an irrevocable trust to accomplish the goal of preserving assets for the family unit, while enabling a person to qualify for Medicaid. If a nursing home application must be made within 5 years of the time a gift in trust is made, it is possible to use other funds to pay out of pocket health care costs and wait until the five year period runs (from the date of asset transfer) before a Medicaid application is filed.
A trust is a separate legal entity whose “rules of the road” are governed by a trust document or trust agreement. A trust is managed by a Trustee, who can be a family member or an independent person or financial institution. There are many advantages of making a gift in trust, as opposed to outright to beneficiaries:
- The trustee has oversight on how the funds are managed and used.
- Disputes among siblings and/or potential overreaching by family members can be minimized.
- The trust agreement can be drafted to insure that things go the way you want, so there is more flexibility, even as you part with control.
- You can garner income and/or estate tax advantages using a trust.
- In Medicaid planning, gifts must be “irrevocable.”
Income Only Medicaid Trusts
This is an irrevocable trust which essentially limits the use of trust funds to “income only.” If the trust provides that income cannot be used for the creator of the trust (known as the “grantor” or “settlor”), and/or the trust invests only in non-income producing assets, the underlying asset (e.g. a family home) will not be considered an available resource for Medicaid.
If the trust is funded with assets which produce income, but the income is paid only to beneficiaries (e.g. children or grandchildren and not the “grantor,”) the underlying asset is not considered a resource for Medicaid, nor is the “income” of the trust considered the income of the Grantor for Medicaid planning purposes.
If a trust owns investment assets and an adult child is named as the income beneficiary, the trustees will distribute the income to the child. While the child cannot be required to use those funds for a parent’s care, there may be a fundamental understanding that this could be the case.