Estate Planning and Medicaid Planning (Two Different Things, or One and the Same?)
Written By: Wills, Trusts, & Estate Administration
Estate Planning, when done properly, can be much more than just a Will and a power of attorney. It can include trust planning, asset protection planning, and Medicaid planning. In fact, accomplishing traditional estate planning goals while also planning for Medicaid eligibility is becoming more of a concern as our baby boomers age and longevity continues to increase.
A. Generally. Most people begin planning for Medicaid too late. A common client scenario I see on a monthly or more frequent basis is as follows: “Mother has suddenly taken ill or has fallen and is going to need help we can’t provide. We will be moving her to a nursing home in a couple of weeks/months, but she wants to go ahead and transfer her CDs and house to us kids.” The family is thinking that if mom makes these transfers it will avoid having to use those assets to pay the nursing home and will protect the assets from the state’s right of recovery laws. The family is wrong.
Here is the problem: Medicaid has a five year “look back” period for most transfers of property. Thus, if you were to transfer all of your assets today, these assets would continue to count against you for Medicaid nursing home eligibility for up to five years, making you ineligible for Medicaid paid nursing home benefits. (There are some (limited) assets that are currently exempt, and there are some advanced techniques that can be used in limited circumstances, such as where the individual has monthly retirement income of at least a few thousand dollars. These techniques are beyond the scope of this article).
So what is one to do? Who wants to transfer all of their assets to plan for a future contingency that may not occur five or more years down the line? But by the same token, who wants to think that their hard earned assets will be claimed by the state rather than pass to their children? This is where Long Term Care Insurance can come into play.
B. Long Term Care (“LTC”) Insurance. Is it right for you? A person’s need for LTC insurance depends in part on the individual’s total net worth, what he or she has available to spend on assisted living/nursing home needs, what amount of monthly income he or she has, and finally, his or her wishes regarding leaving an inheritance. However, it is more often than not wasted money if purchased at too young of an age, and unaffordable if purchased too late in life. Most people who buy LTC insurance range in age from their early 40s to late 60s.
It is statistically documented that 1/3 – 1/2 of all people will spend some amount of time in a nursing home or assisted living facility, and the likelihood increases with age. Studies have also found that the average nursing home stay is 2.4 years, citing data from the Centers for Disease Control and Prevention in Atlanta, Georgia. The national average for nursing home care for a private room is nearly $7,500 per month, or about $90,000 per year. The average costs in Georgia and Alabama are approximately $5,500 – $6,000 per month. (See Met Life’s 2012 Market Survey, available on-line) Several options exist to use LTC insurance as a planning component of your estate, and a LTC policy can be structured to provide a fixed amount for a year or five or longer. This is an issue which you should discuss with your insurance agent, financial adviser and estate planning attorney.
Here is the added benefit of a LTC policy, if the need for assistance arises, and if between retirement income and the LTC policy you have enough monthly cash flow to private pay the monthly nursing home costs, there is no need to make transfers of assets as you will not even need Medicaid to cover the nursing home costs. Alternatively, as long as you have a LTC policy that would pay for five years, you could still transfer all your assets, let the LTC policy kick in, and after five years you are outside of the Medicaid lookback window! This allows you to put off any gratuitous transfer as long as possible until it becomes absolutely necessary.
C. Tax Warnings. There are two particular factors to consider in transferring assets for Medicaid planning. If, for example, Mom transfers her house during life, the recipient receives a “carry over” basis rather than a “step up” in basis to current value as would be the case if inherited at death. In addition, a transfer will cause the loss of any property tax homestead exemption that may be on the house, and may also result in a reassessment by the property taxing authorities, resulting in higher property taxes. These results may be better than the alternative of potentially losing the assets to the state, but these consequences should be considered so that they do not come as a surprise. In addition to these two areas of concern, a transfer of assets will also be a reportable gift such that a federal gift tax return should be filed.