Medicaid Planning: Protecting Your Assets, Including the House

by Michael on Jul 10, 2013 · 11 comments

Photo of Stethoscope on Dollars

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.

1 Thomas | Your Daily Finance July 10, 2013 at 1:34 pm

Oh man this is a lot of information. Good to know and we really should look into this more. My wifey’s mom is getting older and soon my parents will be in the same situation. We just figure they would live with us but we are not sure how things are going to turn out so it is best to be well prepared. Thanks for the info but I am sure this is something we would have to do with a lawyer to get a better understanding of everything.

2 Michael July 10, 2013 at 1:37 pm

Yeah, I would definitely recommend getting advice from a qualified attorney — look before you leap! I mainly put this together to: (1) get everything straight in my head, and (2) help people get at least a general understanding of how things work so they’ll know what questions to ask.

3 Kurt @ Money Counselor July 10, 2013 at 8:43 pm

What are the ethics of going through all sorts of legal and financial machinations so that the taxpayers are required to fund one’s long term care when one has the means to pay these expenses out-of-pocket?

4 Jim March 3, 2014 at 12:44 pm

It is perfectly legal. Many elder law attorneys specialize in estate planning to avoid using clients assets to pay for long term care.

Ethics?? In the US housing industry, homeownership, and property rights in the US, ethics are few and far between.

5 Michael July 10, 2013 at 9:05 pm

Kurt: Good question. You tell me. The rules, as they are written, allow this. The line has to be drawn somewhere, otherwise Medicaid could go back to things like birthday gifts that you gave years ago (if they could find documentation — these are technically gifts in the same legal sense) and hold them against you. Once that line is drawn, it opens the door for people to use it to their advantage.

It’s also worth noting here that the gifts of the sort outlined above (including transfers involving a life estate deed) do count against your lifetime gift tax exclusion, so it’s not like you’re getting off Scot free. That being said, this is a non-issue for many as they’re not likely to exceed the exclusion either way.

Like I said at the end, this is really just a theoretical exercise in the case of my parents as they’re in a position where, thanks to Social Security, pension income, long-term care insurance, etc. it’s hard to imagine them needing public assistance even if they gave the balance of their assets away.

But, as I also said, I’m the kind of guy who like to have all of his bases covered. Thus, I’ve been digging into this, along with a number of other estate planning issues.

6 Kevin July 11, 2013 at 10:09 pm

With a life estate deed, can the grantee be anyone to get the step up in basis or must it be a direct family member?

7 Michael July 11, 2013 at 10:51 pm

Kevin: Excellent question. The short answer is that I’m not sure. Granting to a non-family member isn’t a consideration in our case so I don’t have any information on that. Sorry. But maybe someone else around here knows more about that. If so, hopefully they’ll chime in with a comment.

8 Little House July 12, 2013 at 10:04 am

This definitely sounds complicated. I think the key here, for younger folks, is to start thinking about how one would afford a nursing home in the future without depleting all their assets. I haven’t quite started looking into long-term care insurance, but I’m pretty sure this would help with the costs of a nursing home. Something that’s on my to-do list!

9 Lynne July 12, 2013 at 3:02 pm

My mother had Alzheimer’s for many years. We didn’t shelter her considerable assets, and ended up spending everything we once thought we might inherit–stocks, bonds, house sale–on her care (which was fine; it was her money, not ours). Even that wasn’t enough, and we eventually ran out of money. We were very thankful that Medicaid was there to cover the last couple years in the Alzheimer’s home after her assets were gone. It concerns me that so many people try to shelter their assets, and will drain Medicaid until there is no money left for the people who truly need it.

Also, before sheltering assets, you might want to keep in mind that it can be easier to get into a decent Alzheimer’s home if you have funds for a nice private-pay facility, that may then keep you at Medicaid rates if/when you run out of money after a few years (this was our mom’s experience). If you start out at an all-Medicaid place no one would choose if they had money, you may end up undernourished and unbathed in a facility staffed by uncaring folks who couldn’t get a job at McDonald’s.

10 Michael July 12, 2013 at 3:14 pm

Excellent points, Lynne. I agree that it would be an astonishingly bad idea to bankrupt yourself from the beginning so you could rely on Medicaid.

In most cases, I would guess that people are doing something more like what you described: move into a private-pay facility and then possibly shift some things around over time to protect a portion of their assets.

For the record, I feel the same way about my parents’ assets as you did about your mom’s. It’s their money, and it’s there to provide them with support and comfort as they age.

And as I noted above, they’re in a comfortable position with respect to retirement income and LTC coverage so it’s hard to imagine them running into financial issues anytime soon — but never say never!

11 Randy Conley July 16, 2013 at 11:17 am

Make sure you consult an actual Eldercare attorney. They understand the specific laws in your state that apply to Medicare. We were able to move $20K+ into a special account for my mother and she still qualified for Medicare (2000, Texas). This money was used for things that made her stay in the nursing home more comfortable (clothing, etc). The laws may have changed, but be sure you consult the right person. I have a coworker who spent $100K plus “spending down” her aunt’s resources when some of it could have been sheltered. She consulted an attorney friend who gave her the wrong info.

And, by the way, I am a taxpayer – my parents and I (and siblings) paid (and continue to pay) our fair share of taxes. Medicad is is a benefit open to everyone who meet the requirements.

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