Medicaid and Estate Planning

Do you know someone who has spent time in a nursing home? Have you ever thought about going into a nursing home yourself? Most people answer the first question yes, and the second question no. It is one of those situations where we feel “It could never happen to me.” But studies show that approximately two (2) out of every five (5) people reaching age 65 will need some type of long-term care. Are you one of the many people who would prefer to stay at home no matter what the cost? Without proper planning, the lack of available services and the staggering price-tag may leave you with few alternatives.

Unlike Medicare, Medicaid is a government program which pays medical costs and long-term care costs. Medicaid is designed as a payor of last resort, however, and to qualify you must meet strict financial and other eligibility requirements. The rules governing Medicaid are complex, and frequently change, requiring great care in the planning and application for benefits.

What can be done to plan for long-term care, ensure that a health crisis or chronic illness will not erode an individual’s security and dignity, and provide for family and loved ones? The answer is not simple. A careful analysis of each individual’s personal and financial situation must be done to formulate the proper plan. Factors such as income from social security, pensions and investments; the nature and value of assets; age and health; family situation; and other considerations must be evaluated in order to make the right choices.

Proactive Planning

If long-term care insurance is not an option, one planning technique is to transfer assets into a “Medicaid Asset Protection Trust,” preserving the assets for the spouse, children or other beneficiaries. When properly drafted, the trust will provide asset protection, with significant tax benefits as well, including avoidance of gift taxes, and elimination of capital gains taxes.

In addition, trust assets will avoid probate. The trust allows the Trustee to access the income and principal of the trust during the Grantor’s lifetime for the benefit of the Grantor’s children or other beneficiaries, although the Trustee cannot give the principal directly to the Grantor. Most Grantors also choose to maintain the right (called a Special Power of Appointment) to change the ultimate beneficiaries of the trust, by “reappointing” the assets to different family members at a later date. This power retains control for the Grantor, and prevents transfers to the trust from being treated as taxable gifts.

Crisis Planning

Even if nursing home care is imminent, planning opportunities exist to protect a substantial portion of the applicant’s assets. Proper use of the Medicaid transfer rules allows individuals to provide security for themselves and a legacy to their families, while ensuring that they will receive long-term care. By gifting the appropriate amount of assets, and structuring other asset transfers as an exchange for a secured interest, much like a loan, through the use of a promissory note, private annuity or Grantor Retained Annuity Trust (GRAT) to pay for expenses during the period of ineligibility which is created by the gifts, individuals can channel assets to a trust, or to children and grandchildren, while receiving sufficient income through the note or annuity payments to pay for their care until Medicaid is available.