estate planning programs
The Six Most Common, and Costly, Estate Planning Mistakes Made by Medicaid Applicants
It seems to be both a gift and a curse that Americans are living much longer than previous generations. Obviously, everyone wants to have as many happy, healthy years as possible but with longer lifespans comes the need to plan for what can be financially disastrous medical costs. In fact, the longer you live the more likely it is that you will need long term care either at home or in some sort of assisted living or nursing home setting. The cost for such care can be staggering. Depending on geographic location and level of care required the cost of a nursing home can be anywhere from $50,000 – $150,000 annually.
Studies have shown that most individuals going into a nursing home exhaust their savings in two years or less. Put another way, the nest egg that you have spent the better part of a lifetime saving and sacrificing to accumulate will likely be wiped out in a few short months. To avoid this fate there are generally two options: 1.Purchase private long term care insurance, or 2. Receive assistance through the Medicaid program.
Medicaid is a federally funded state administered program which provides for the cost of long term care or nursing home care for qualified applicants. Although the specifics vary from state to state, in general an individual must meet the following criteria in order to receive benefits under Medicaid:
- You must be determined to be medically needy by the US Department of Health and Rehabilitative Services and reside in a Medicaid qualifying nursing home.
- The individual must have a monthly income of less than about $1,700 including social security, pensions, and disability payments.
- The individual must have fewer than $2000 in assets.
An individual who applies for Medicaid but fails to meet the above criteria will either be forced to spend down his assets before Medicaid will kick in or risk losing assets to the government to cover the cost of care. Careful planning, whether in advance or in response to an unanticipated need for care, can help protect your estate, whether for your spouse or for your children. Failing to plan, or planning imprudently, could literally cost you hundreds of thousands of dollars. The following are the seven most costly, and common, estate planning mistakes made by Medicaid applicants.
1. Gifting Assets Without a Plan
Many Medicaid applicants mistakenly believe that they can simply give all their assets to their children or beneficiaries in order to comply with the asset criteria above. This is often a catastrophic mistake. Even those that are aware that they cannot just gift all their assets somehow seem to be under the belief that they can simply gift up to $13,000 per year until they are under the Medicaid asset limit. This too is wrong. While it is true that gifting assets can sometimes be an effective component of a Medicaid asset protection plan, gifting without fully understanding how gifting can fit within a comprehensive plan can have undesired consequences. In fact the Medicaid rules implemented after the Deficit Reduction Act of 2006
punishes transfers in certain instances but allows them in others. The point here is that you, or your advisor, must clearly understand the rules and any gifting must be done as part of a comprehensive asset protection plan.
2. Using a Living Trust to Protect Assets from Medicaid
Although there are many benefits to a properly drawn living trust, Medicaid asset protection is simply not one of them. In order to prevent assets from being included in the applicant’s Medicaid estate the applicant must no longer own or control them. The essence of a living trust is its flexibility and revocable nature. When you place your assets in a living trust you still control them and the trust can be revoked at any time for virtually any purpose. Because of this control and flexibility, assets held in a living trust are not protected from Medicaid. Instead, applicants should consider an “irrevocable” trust. As its name implies, once an irrevocable trust has been established it cannot be revoked and assets placed in the trust cannot be removed. Trusts can be powerful estate planning and asset protection tools but if your intent is to protect assets from Medicaid, care must be taken in the trusts’ drafting and implementation.
3. Assuming their Old Annuity will Protect Assets Against Medicaid
Annuities can be a powerful asset protection tool for an individual needing Medicaid benefits if used properly. Many couples have purchased annuities on the advice of an insurance sales agent. They were likely assured that the annuity would protect their assets in the event that they needed to apply for Medicaid benefits. While this may have been true in the past, the Deficit Reduction Act of 2006 changed many of the rules governing the use of annuities in Medicaid planning. Many annuities sold prior to 2006 have little or no protective value under the new rules. Most modern annuities (referred to as DRA Medicaid-compliant) when used properly provide significant protection of assets. Note, even modern annuities , the Medicaid applicant must take care to ensure that his annuity is an immediate annuity as opposed to a deferred annuity as a deferred annuity will offer no asset protection benefit whatsoever.
4. Waiting Too Long to Begin Planning
We’ve all heard the phrase “objects in motion tend to remain in motion.” The flip side is that objects at rest tend to remain at rest. It is this tendency to remain at rest instead of taking action that causes thousands of families to lose out on valuable Medicaid benefits. Many of asset protection strategies involve some sort of gifting or transfer of assets to a trust or outright to beneficiaries. Most gifts and transfers trigger a period of Medicaid ineligibility which will last 36 or 60 months depending on whether the assets were transferred to a spouse or non-spouse. For example: John and Mary, both in their 70’s, have accumulated $150,000 in retirement funds and one income producing investment property during their 50+ years of working and saving. John suffers a stroke and upon being released from the hospital will require round the clock care which Mary cannot provide alone. They discover that they are ineligible for Medicaid because of their savings and rental real estate. They are told to “spend down” these assets in order to qualify for Medicaid. Seven years ago they were advised by a qualified planner to implement an asset protection plan involving placing their real estate in trust and moving their savings into an immediate annuity. If they attempted to execute this plan now the transfer would trigger a 60 month “look back period” and render John ineligible for Medicaid for 5 years.
5. Trying to Hide Assets from Medicaid
Simply put, trying to hide assets from Medicaid is a very bad idea. Don’t do it. Sometimes families will conveniently “forget” to list assets when applying for Medicaid gambling that the government won’t find out. You should know that doing so is a crime and subject to prosecution. Although prosecution is an unlikely threat, loss of eligibility is a real probability. Having a sick loved-one and going through the frustrating and time consuming Medicaid process don’t make matters worse by attempting a fraud.
6. Relying on Non-expert Advice
I am always amazed to learn that people have made hugely important decisions on the advice of neighbors, family and friends, insurance agents, or anyone except a credentialed and experienced Medicaid specialist. These people act on hearsay and guesswork in making life-changing decisions involving the healthcare of their closest relatives. However, these same people likely would not sign a contract without consulting an attorney, purchase a home without a realtor, or buy stock without speaking to a financial advisor. The result is often predictable, the applicant is denied eligibility and the family must either drain their life savings to pay for care or the sick family member is denied access to care entirely.
Often families will think they’re doing the right thing by relying on the advice of the Medicaid case worker. These people mean well but they are not qualified experts on Medicaid planning nor are they allowed to render financial or legal advice. Moreover, their job is to simply determine Medicaid eligibility not to help you preserve your life savings and you children’s legacy in the process. So when the worker says: “You have to ‘spend-down’ your assets on care,” that is not only not in your best interest, it is likely untrue. Do not assume that the Medicaid worker, is on your side.
Competent Medicaid planning can only be rendered by someone with someone with a background in elder law, estate planning, and financial planning. Don’t be afraid to ask about his credentials, licensing, experience and continuing training. Look for publications and reviews by other professionals. Ask to speak with her references. Planning for Medicaid is complicated and the decisions are extremely important. Many of these decisions are irreversible and will affect the healthcare of your loved ones.
About the Author
Corey W Hankerson JD is a financial advisor and tax practitioner in the Washington DC area. His practice, The Equity Law Group, focuses on tax planning, estate planning, and asset protection. Hankerson can be reached via email at: chankerson@theequitylawgroup.com, by phone at: 888.665.7779, or by visiting www.theequitylawgroup.com.
Jasmine D Neville Esq is an attorney with the Washington DC firm of Williams and Connolly LLP. She can be reached via email at:jneville@wc.com, or by dialing 202.434.5000.
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