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Medicaid is discussed in some detail in a previous section. Generally, Medicaid comes into play for seniors when there is a need for nursing home care. Nursing homes are extremely expensive. Most older people don't have the income to cover nursing home costs especially if there is a healthy spouse at home. They generally rely on accumulated assets to cover the difference. But those expensive costs can chew away assets rather quickly. The only way to preserve any assets under Medicaid nursing home coverage is to transfer those assets to the intended heirs at some point prior to needing a nursing home or during the nursing home stay.
Transferred assets will cause a penalty as described previously and below. But transferring assets will also allow Medicaid to pay for its share of care at an earlier point. The goal of this planning is to get as much money into the hands of the healthy spouse or the children and reduce the amount of assets that have to go towards the private pay cost of a nursing home.
Gifting assets for Medicaid purposes creates a penalty. The penalty is determined by dividing the amount of gifted asset by the state Medicaid rate. This is supposed to be the average monthly nursing home cost in the state. Suppose John gave away $200,000 and his state Medicaid rate is $5,000 per month. John's penalty is 40 months. This means that when John would otherwise qualify for Medicaid and he applies for benefits, he must pay for his own care for an additional 40 months before Medicaid will take over. If the $200,000 that John gave away is not available to pay for this extra 40 months of care, John has a real problem.
The planning that is done in conjunction with these gifts must take into account how the penalty period will be covered. There are a number of strategies that address this issue. Some of the more common ones are discussed below.
The Medicaid penalty is assessed up to five years after the date of gifting the asset. Using our example above, if John gives away his $200,000 on January 1 of 2011, and he applies for Medicaid prior to January 1, 2016, he will be assessed his penalty. If he applies after January 1, 2016 the penalty will not be assessed.
There is a hidden danger in applying for Medicaid within the five-year look back period. If the amount of money gifted is too large, the penalty can exceed five years and it's better either not to do the gifting if one is anticipating Medicaid within five years or to somehow figure out how to get past the five years if a large sum of money is gifted.
For example suppose John had given away $600,000. If the Medicaid rate is $5,000 a month, his penalty is 120 months or 10 years. With this kind of penalty Medicaid would likely never have to pay any of John's care costs. Obviously with a gift this size John would design a strategy where he would definitely not apply for Medicaid within the five-year look back. Such strategies can be designed so as to maximize the amount of money ending up with the surviving spouse or other intended beneficiaries.
Medicaid generally allows $1,500 to be set aside for purposes of burial that does not have to count toward the asset limit. Most states allow for more money to be set aside if it is held in a specially designed trust for Medicaid purposes. This is called a Medicaid funeral trust. Many of these trusts use guaranteed issue life insurance to create the cash at death. A funeral trust for the amount of a typical funeral should be set up from existing assets for the client and the client spouse prior to any other gifting strategies. It is not useful to put more money than is needed into the trust because any unused money will go back to the state. Some states allow up to $20,000 per trust.
There is an asset test for Medicaid long term care purposes but essentially no income test. Even in those so-called income test date states that do employ a strict income test for qualification, people can qualify with more income simply by putting their cash flow stream into a special trust for Medicaid purposes. These are typically called income qualifying trusts or more commonly Miller trusts. Since there is essentially no income test, a good way to divest assets for purposes of qualifying for Medicaid is to convert those assets to income.
Unfortunately, Medicaid is wise to this practice and for a Medicaid recipient to convert assets to income hoping to have Medicaid pick up the difference and after have the remainder of the income stream go to a member of the family does not work. There are certain rules and penalties for doing this that basically shut down this strategy.
There is one strategy for converting assets to income that is still allowed under certain conditions. Previously we learned that a married couple is required to split up their assets with the so-called community spouse keeping her state-allowed portion for her needs and the nursing home spouse having to spend down his share of the assets before one can qualify for Medicaid. He could certainly employ the half a loaf strategy with someone other than his wife, but she should be the recipient of the extra assets in order to maintain the lifestyle that was experienced before nursing home care threatened to destroy everything.
The strategy is called a community spouse Medicaid annuity. Here's how it works. Suppose Fred and Mary divided up their $100,000 in resources each taking $50,000 when Fred applied for Medicaid. (In about half the states this division of assets might work somewhat differently and Mary could keep the entire $100,000). Fred has to spend his $50,000 down to less than $2,000 and then Medicaid will take over his uncovered nursing home costs. Instead, Fred transfers his $50,000 to Mary.
As far as Medicaid is concerned, the $50,000 still belongs to Fred even though Mary now owns it. But Mary can buy an income annuity with this $50,000 that meets certain Medicaid rules and this income annuity has turned the asset into a non-countable income stream. Fred is now eligible for Medicaid and Mary has additional income that can help her deal with her needs in the community. If Fred dies before the end of the annuity payout, the balance of that payout, up to what Fred owes Medicaid for covering his care costs, must be paid to the state. Mary gets to keep what's left.
Some states are really not very cooperative about allowing this practice and seem to try every tactic possible to discourage these types of arrangements even though under federal law they are legal. Other states are more amenable. Every state that has been challenged up to a federal court level has so far lost its case in trying to prevent these kinds of arrangements.
A personal service contract is a paid services arrangement between a member of the family and the person needing care. Typically, children or grandchildren will care for aging loved ones in their home. They might provide help with activities of daily living such as getting out of bed, dressing, bathing, using the bathroom and so forth. Help might also be provided with cooking meals, cleaning, answering the phone, running errands, paying bills and so on. In some instances, constant supervision must be provided for loved ones who suffer from dementia or severe memory loss.
Family members often offer these services without reimbursement. There are many reasons why family members could be paid for their services under a personal service contract. Probably the most important is a situation where a family member has limited employment or quit employment altogether in order to take care of a loved parent or grandparent at home. Being paid for this care helps compensate for loss of income. Another reason might simply be that if there are assets to pay for the care, the family members providing care deserve to be paid for their time.
Personal service contracts can also be used to transfer assets prior to application for Medicaid. As we learned previously, transferring assets to a member of the family where no legitimate product or service of equal value is provided in return, results in a penalty from Medicaid when application is made.
Most states allow a potential Medicaid applicant to transfer money to children or grandchildren in exchange for legitimate care services provided at home or in the facility - but only on a month by month basis. One state in particular - Florida - allows a lump sum to be set aside to provide care for the remaining years of the Medicaid recipient's life. In other words, someone anticipating Medicaid in Florida, could transfer 7 years worth - for a family member with that amount of life expectancy - of money for personal care services from a member of the family and essentially remove that money from the estate.
For example, suppose Mary set aside $150,000 in a special account for her daughter Melissa to provide care for the rest of Mary's life. If this is done properly and following the correct rules in Florida, the $150,000 does not count as a gift and does not produce a penalty when Mary would apply for Medicaid.
Other states do not allow this kind of a lump sum set-aside. They only allow money to be gifted on a month-to-month basis. This is still a valid strategy if it is started years before applying for Medicaid. A substantial amount of money can still be transferred to the children without creating a penalty.
Personal care service contracts must be created in accordance with the rules set by each state. This usually means an acceptable care contract, care logs to provide evidence of providing the services and evidence that the person providing the care is billing the services at a reasonable cost. In most cases a reasonable cost would be somewhere around $20-$30 an hour.
We could provide pages and pages of additional strategies that are acceptable for accelerating Medicaid payment and gifting assets without triggering a penalty for Medicaid. Here is a list of just of a few of these strategies.