Many couples, in their golden years, find themselves wondering: What if one or both of them is admitted into a nursing home and needs Medicaid? After saving throughout their lives, they are fearful that if one of them enters a nursing home, they will have to dissipate their life savings to pay for the cost of care before they can become eligible for Medicaid.
Moreover, some couples with wills drafted in the past may not realize that their wills could harm them if they did not consider Medicaid issues when they executed them.
Sometimes, couples attempt to make an estate plan leaving all assets to each other upon the death of the other spouse. These are sometimes called “sweetheart” wills. This may seem appropriate and easy to do at the time, but if the surviving spouse is on the verge of entering a nursing home and then inherits a large amount of money from the deceased spouse, the surviving spouse may not be eligible for Medicaid. Such an estate plan could result in a difficult situation for the surviving spouse.
One estate planning technique that a couple could consider is having terms set forth in their wills that set forth a supplemental or special needs trust. With this strategy, instead of leaving all the assets outright to the surviving spouse, the assets are distributed to the testamentary special needs trust. This way, at the death of one spouse, all assets would pass to the special needs trust, helping to ensure that the surviving spouse would be eligible for, or could keep, Medicaid benefits, and the inherited assets would be available to supplement his or her care.
Other Considerations When Contemplating Medicaid
Even when executing wills with trust provisions, there are other factors that a couple must consider in their estate plan. For example:
1. The Medicaid Transfer Penalty
If a couple finds that they are in a situation where they have assets greater than what is allowed under Medicaid, they may contemplate transferring assets to be eligible for Medicaid. However, with the transfer of assets to third parties, such as children, a Medicaid applicant might be subject to a penalty period during which the person would be ineligible for coverage if he or she transferred assets for “less than fair market value” within the five years prior to applying for aid.
The state divides the value of all gifts made within the five years leading up to the Medicaid application by the average monthly cost of nursing home care in order to determine the penalty period. For example, let’s say the average monthly cost of nursing home care is $5,000. Thus, an individual who transferred $60,000 within the five-year period would be subject to 12 months of ineligibility running from the date of the Medicaid application.
2. Estate Recovery
Federal law requires states to seek recovery of Medicaid benefits from the estate of a deceased Medicaid recipient. An applicant’s home, vehicle, and several other items are treated as exempt assets and not counted under the asset test when qualifying for Medicaid. However, while these assets are exempt for qualification purposes, they are subject to Medicaid’s right to reimburse itself for benefits paid out to the Medicaid recipient after the recipient has died.
There are several exceptions to this rule, very few of which are common knowledge. For example, assets transferred to a disabled child either outright or in a special needs trust avoid treatment as a transfer for Medicaid purposes, and also avoid estate recovery.
3. Transferring Assets to Joint Ownership
Adding a non-spouse as a joint owner on a bank account or other property will likely be considered a gratuitous transfer for Medicaid purposes. If the transaction occurred within the five years leading up to the filing of a Medicaid application, a transfer penalty will likely be imposed. There may be arguments against the imposition of the penalty, but other estate planning techniques may be more appropriate. If there is just the need to have a joint bank account for convenience only, it may be better to have a durable power of attorney. Alternatively, an option is to add the loved one’s name to the account as an authorized signature provider only, with no ownership rights.
4. Protecting Your Assets with the Use of Trusts
In addition to the testamentary trusts previously discussed, other trusts are typically used to help applicants qualify for Medicaid or to prevent estate recovery of certain assets. Trusts can also prove useful in preventing individuals who are already receiving public benefits from losing them. For example, an applicant may have very few assets but, because of his or her income, still fail to qualify for Medicaid benefits depending on the state. An applicant who exceeds the income cap may still qualify for benefits provided all income in excess of the income cap is placed into a certain type of trust (sometimes called a Miller trust) each month.
5. A First-Party Special Needs Trust
What happens if an individual receives assets that effectively disqualifies him or her from Medicaid? Or, a Medicaid recipient inherits money or gets a payout from a litigation claim? In either situation, the funds received will most likely disqualify the individual from receiving additional benefits unless one of several federally permitted options is used.
Execution of a first-party special needs trust is one option. These trusts are funded with assets owned by the individual receiving Medicaid. First-party trusts must include a payback provision allowing the state to reimburse itself for benefits paid to or for the benefit of the special needs individual. First-party special needs trusts also have additional limitations.