Over the past week, I’ve been giving myself a crash course in Medicaid planning. I guess that’s what happens when your parents advance in age and start having health problems.
In case you weren’t aware, most states require the elderly to spend down their assets to a few thousand dollars (or less) before they’ll step in and cover the cost of nursing home care.
This is understandable, as nobody wants to foot the bill for people who can easily afford to cover the costs of their own care. At the same time, many seniors wish to protect their assets against depletion due to their long-term care needs.
While the solution seems obvious — just give away your assets — it’s not as simple as it sounds. But with some forethought, it is possible to protect your assets from being completely depleted by your long-term care costs.
Before we going any further… Yes, I realize that this “protection” comes at a cost (to taxpayers), and that opinions are likely to differ on the ethics of this sort of Medicaid planning. That’s all well and good, but that’s not the point of this article.
The point of this article is to provide an overview of some important considerations when disposing of assets in advance of qualifying for Medicaid. Please just keep in mind that I’m far from being an expert on the subject.
In other words, while the following is based on my notes from a rather lengthy discussion with an estate attorney, you would be well advised to seek professional counsel before making any decisions of your own.
Enough caveats? Good. Let’s get started.
Gifts and Medicaid (in)eligibility
The short version is that any gifts or “uncompensated transfers” trigger a five year waiting period before you can claim Medicaid. This is true whether or not the gift stays below the annual gift tax exclusion, currently $14k per recipient.
Note: The Deficit Reduction Act of 2005 increased the length of this waiting period — the so-called “look-back period” — from three to five years.
If you need nursing home care during the five look-back period, you’ll have to pay privately until you satisfy a penalty period. This penalty period is based on the size of the gift/transfer and the estimated cost of care (which varies by locale).
Say, for example, that you gave away assets worth $55k and that the average cost of care is $5,500/month. In that case, you’ll remain ineligible for Medicaid for 10 months after your initial claim. But once you make it past the five year look-back period, your gift is in the clear and can’t be held against you.
Unringing the bell
The other possibility would be to undo the gift. Once the money has been recovered, it would once again be available to pay for your care. And once it’s been depleted, you would be eligible for Medicaid. Why bother? Well…
The advantage of undoing the gift vs. waiting out the penalty period is that the real-world cost of care is often higher than the estimate used for calculating the penalty period. Thus, you could lose Medicaid eligibility for longer than it would otherwise take to deplete the value of the gift.
Also: if you make multiple gifts, each is subject to its own five year waiting period. So let’s say you give away $50k this year and $100k next year. Five years from now, that initial $50k gift will be in the clear but you’ll still have another year to go before the second ($100k) gift would be in the clear.
Protecting your home
Quite often, the asset that people are most interested in protecting is the family home. The good news is that the home is considered an “excluded resource” and is thus protected for a Medicaid recipient, the recipient’s spouse, and certain dependent relatives who are living there.
But once it’s no longer serving as a place of residence for the recipient, spouse, or dependent(s), the home becomes a countable asset and the equity value is counted against Medicaid eligibility limits. So yes, if you run out of money, you could be forced to sell and use the proceeds to support your care.
Moreover, even if the Medicaid recipient or their spouse lives in the home until their death, the state can still make a claim against the home’s value (and any other remaining assets) after they’re gone to help offset any long-term care expenditures incurred on behalf of the recipient.
The workaround to this problem is much the same as for other assets: give it away at least five years in advance. But who wants to give their home away? I mean, what’s to stop the grantee(s) from kicking you out of your house after you transfer title?
Even if the grantee(s) have only the best intentions, it’s possible that they’ll get sued, go bankrupt, or go through an acrimonious divorce. Said another way, things could end poorly for the (former) homeowner…
Creating a life estate deed
The solution here is an instrument known as a life estate deed. In essence, a life estate deed is a document that allows you to transfer ownership of your home to someone else while retaining the right to live there for the remainder of your life.
There are some clear advantages of using a life estate deed vs. making a straight up gift. The biggest of these, as noted above, is that it protects the right of the grantor(s) to continue living in the home.
Another advantage is that, with a life estate deed, the grantee(s) inherit(s) the property with a stepped up cost basis. In contrast, with a plain old gift, the grantee(s) get the property with the original cost basis. This is a potentially huge deal when it comes to future capital gains tax liabilities.
The downside of a life estate deed is that some fraction of the value is technically retained by the grantor(s) based on their age. This amount dwindles over time (as they fewer years left) but it’s possible that Medicaid will ask for compensation in proportion to the remaining interest at the time of the grantor(s) death.
Finally, it’s worth noting that either scenario (plain old gift or life estate deed) can be undone if absolutely necessary, though it would require the consent of the grantee(s). This would involve dissolving the life estate (if applicable) and then signing a quit claim deed to transfer the property back to the grantor.
Whew! Overwhelmed? I sure am.
This is mostly a theoretical exercise as my parents have solid retirement income and excellent long-term care insurance. Nonetheless, I like having all the bases covered, and I’m also hoping that others will find value in this information.
But please remember…
Medicaid planning is a complex topic. You should thus consider consulting an attorney with estate planning experience before making any decisions on your own.