Qualifying for Medicaid
While anyone over age 65 qualifies for Medicare, there are strict income requirements to qualify for Medicaid. Generally speaking, Medicaid is only intended to benefit individuals with low incomes. When considering your eligibility for the program, the state Medicaid agency will look at the value of your assets. Generally speaking, you’ll need less than $2,000 in countable assets to qualify for Medicaid benefits. When assessing “countable assets,” the state Medicaid agency will look at assets such as bank accounts, brokerage accounts, retirement accounts, pensions, annuities, and valuable assets such as your home and vehicles.
The look-back period
Congress wants to provide affordable healthcare to low-income individuals, but they don’t want to reward people for giving their assets away just to qualify for free healthcare. At the same time, they don’t want to penalize people for legitimate gifts. To address the issue, Medicaid has adopted strict rules to scrutinize wealth transfers. When you apply for Medicaid benefits, the state Medicaid agency will look at any gifts made in the previous five years. This period is known as the “look-back period.”
Asset transfer rules
If you’ve made any gifts in the last five years that do not qualify as exempt from Medicaid calculations (discussed later), the state Medicaid agency will compute a penalty period based on the value of the wealth transfer, and the average cost of care in your state. The agency will divide the value of the transferred assets by the average monthly cost of care to calculate how many months of care could have been covered by the transferred assets.
For example, let’s say the average monthly cost of care in your state is $6,000. If you gifted $12,000 to your daughter six months ago, you would have a penalty of two months. If you transferred the title of your $600,000 home to your daughter, you’d get hit with a penalty of 100 months, or a little over eight years. To make matters worse, your penalty period does not begin until you actually qualify for Medicaid.
Using the first example, if you transfer $6,000 to your daughter on January 1, enter a nursing home on July 1, and don’t qualify for Medicaid until November 1, your two-month penalty period would disqualify you for benefits in November and December of that year. You would not be eligible for Medicaid benefits until January 1 of the next year.
Exceptions to the asset transfer rules
There are certain circumstances where a gift would not trigger a penalty period. These include transfers to:
- Your spouse
- Another individual, to be used for your spouse’s benefit
- A disabled child
- A trust for a disabled child
- A trust for a disabled adult under 65-years-old
There are also some instances where you can transfer title of your home without incurring a Medicaid penalty. Exempt situations include transfers to:
- Your spouse
- A disabled child under age 21
- A trust established for the benefit of a disabled adult under age 65
- A sibling who has lived in the home for at least one year, and who already holds an equity interest in the property
- A “caretaker child” who has lived in the home for at least two years, whose caretaking allowed the homeowner to avoid staying in a nursing home
If you are applying for Medicaid and are facing a penalty period, you can nullify the penalty by retaking possession of the gifted assets. However, this can be difficult to do as it would require the recipient to give up the assets. In the case of assets transferred to a trust, especially one that is irrevocable, unfortunately that may not be an option.
Using an irrevocable living trust
The good news is that with advance planning, you can lower the value of your estate to qualify for Medicaid without sacrificing your children’s inheritance. One of the most common methods of doing this is to create an irrevocable living trust, and transfer your assets to the trust. As long as you are not the trustee, you do not have access to the principal value, the transfer is outside of the look-back period, and you do not have control over the timing or amount of income distributed by the trustee, assets in the trust will not be considered countable assets for Medicaid-purposes.
Using an irrevocable testamentary trust
If you are married, you can leave directions in your will to establish an irrevocable trust for your spouse’s benefit—known as a testamentary trust. Unlike a living trust, a testamentary trust isn’t established until after you die. Assets transferred to this trust would not be considered countable assets for Medicaid purposes, nor would income from the trust, providing the income is only used for luxuries or treatment not typically covered by Medicaid.
Advantages of an irrevocable trust
Whether you establish a living or a testamentary trust, either option can be a favorable alternative to gifting assets to your children and relying on them to pay for your care and treatment. Once you transfer assets to another person, they are under no obligation to use the funds for your benefit, and they cannot be required to repay the assets if you request them back.
With an irrevocable trust, you can count on a third-party trustee to administer the assets inside the trust for your benefit. If you are the primary beneficiary and your children are the contingent beneficiaries, you can continue to receive income from the trust until you die, at which point the residual value will be transferred to your children.
Additional benefits of a trust include its ability to transfer assets outside of probate, and a trustee’s authority to administer the assets for your benefit if you become incapacitated. In that situation, the trustee can continue to pay your bills and handle your finances as long as you’re unable to do so yourself. Finally, assets transferred to an irrevocable trust are removed from your estate, which may lower your exposure to estate taxes.
Disadvantages of an irrevocable living trust
The primary disadvantage of an irrevocable trust is the inability to amend the terms of the trust. Once you transfer the assets, you cannot access the principal, and you cannot dictate how or when you receive income payments. If something unexpected occurs that necessitates accessing more money that the trust agreement allows, you may be unable to pay for the unanticipated costs. Because of this, it’s smart to retain some assets to maintain a measure of liquidity.
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