Part of the Transforming Life as We Age Special Report
When it’s time to pay long-term care costs, your income from savings, pensions or other sources may be too little to cover nursing care costs but too high for you to qualify for Medicaid. However, with proper estate planning, some mid- to upper-income people in their 50s and 60s can qualify for Medicaid and receive support for long-term care.
The rules for Medicaid eligibility vary around the country, since the federal government and the states run the program jointly. But according to the American Council on Aging’s Medicaid Planning Assistance resource, an individual’s incomes must be under $2,205 a month in 2017 to qualify.
What Is Medicaid Planning?
Proper Medicaid planning, done in advance with assistance from an elder care attorney, may help you qualify for Medicaid when you need long-term care one day. It’s about transferring assets in advance so your income is under the threshold. “If one’s income is even 50 cents more than the cap, they don’t qualify,” says certified elder law attorney Ronald Morton, of Morton Law Firm, who is based in Clinton, Miss.
Medicaid eligibility is assessed by reviewing what are called exempt assets and non-exempt assets. Exempt assets are not considered for us in the applicant’s care; non-exempt assets are counted as ones that could be used to contribute to care costs.
A few non-exempt assets for Medicaid eligibility purposes include retirement accounts, mutual funds, stocks checking and savings accounts and real estate (primary residence excluded). The combination of these assets could easily disqualify an individual from Medicaid.
The Medicaid Look-Back Rules
One of the main hurdles that Medicaid imposes for eligibility is the five-year ‘look back’ period. (Select states have a three-year period; you can find your state’s rules through its Medicaid office.) This rule means that if an individual satisfies the asset value threshold for Medicaid today but did not at any point during the previous five years, he or she will be disqualified.
Consequently, when health takes an unexpected turn and Medicaid planning has not been implemented in advance, asset transfers won’t help you meet the Medicaid asset threshold for eligibility.
This is why advance planning is critical.
Says Morton: “Crisis planning is typically equal to the cost of one to two months’ cost of nursing home care, between $10,000 and $25,000. And planning in a crisis will typically only save half of the person’s assets.”
Many individuals gift or sell property several years before applying for Medicaid with an intent to qualify for the program. But without proper guidance on asset transfers, these actions could come with gifting penalties.
How a Medicaid Trust Can Help
Medicaid trusts are one option for people interested in preserving assets as well as their Medicaid eligibility. These legal tools hold assets in trust so they are not counted as part of a person’s Medicaid application. But they must be put into use far enough in advance to satisfy eligibility requirements.
The cost of setting up a Medicaid trust depends on its terms, other planning and the number, value and nature of assets being protected.
A typical Medicaid trust might cost between $5,000 and $10,000. “However, we have some Medicaid pre-planning trusts that cost as little as $4,500,” says Morton.
If you take a far-ranging perspective to planning, the early costs could actually be far less than the cost of not planning. Joseph Karp, a certified elder law attorney in Palm Beach Gardens, Fla. says: “Family members will be the trustees; therefore, the costs of administration are modest.”
Expect to pay accounting fees for annual tax return filing and, if needed, ongoing legal advisement and trustee guidance.
Medicaid Trusts have a few downsides. These trusts are irrevocable, which means the terms cannot be changed. Also, surrendering control can be challenging. Asset control falls in the hands of the trustee and the trust creator cannot be trustee.
Considerations for Creating a Medicaid Trust
When creating a Medicaid trust, consider:
Proper trust terms “Will a revocable living trust protect my money if I’m in a nursing home? No,” says Morton. A revocable living trust is not the same as a Medicaid trust. But the misunderstanding that a trust is a trust is fairly common. “It’s a mistake I see over and over,” says Morton.
Asset transfers Consult an attorney about proper timing and types of asset transfers. Be clear about the goal of these transfers.
Income caps and trusts Income can be a Medicaid disqualifier if you live in a state with an income cap; more than 20 states do. Consult the Department of Health and Human Services in your state to learn how your state treats income.
But the type of care may be a factor, too. Says Morton: “If Medicaid benefits are used for skilled nursing care, there is a way of sheltering excess income.” The method involves assigning excess income to a trust commonly referred to as a Qualified Income Trust or Miller Trust (typical fee to set one up: $1,000 to $2,500).
“Since the trust is not allowed to earn any income, there is no need to even file a tax return,” says Karp.
This kind of trust lets you retain a nominal monthly needs allowance determined by the state and the trust can also pay a certain amount of an insurance premium. However, Morton notes, a state might limit payout to a single supplemental policy.
Keeping Medicaid Planning Up-to-Date
If you set up a Medicaid trust, Karp recommends keeping an updated power of attorney with language allowing a spouse, life partner, adult child or fiduciary to manage Medicaid planning, if needed. These documents “help avoid exploitation of the elderly claims,” Karp says.
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