Using Estate Planning to Prepare for Medicaid

Long-term care involves not only a loss of personal autonomy; it also comes at a tremendous financial price. Proper planning can help your family prepare for the financial toll and protect assets for future generations.

Medicare may cover the cost of skilled nursing care if you are transferring directly from a hospital to a skilled nursing facility and you will be there for 100 days or less of rehabilitation. Costs that are not covered by Medicare must be covered by private long-term care insurance or paid by you. Medicaid helps pay for long-term care, but you must first complete an application and be determined medically and financially eligible.

In Wisconsin, Medicaid rules require that single recipients have no more than $2,000 in countable assets (the figure may be different in some states) and limited income. Any excess assets need to be spent down before you can qualify for Medicaid. In addition, if you make gifts (transfer assets for less than fair market value) within five years of applying for Medicaid, you may be subject to a penalty period during which you cannot receive benefits. Medicaid also has the right to recover from your estate and the estate of your spouse after your deaths.

Careful planning in advance can help protect your estate for your spouse or children. If you make a plan before you need long-term care, you may qualify for Medicaid benefits more quickly and have the luxury of distributing or protecting your assets. The following are some tools that can be used in an estate plan to prepare for Medicaid:

• Maximize non-countable assets. Depending on your circumstances, there are certain assets that are not counted for Medicaid eligibility purposes. By converting assets from countable to non-countable, you may qualify for Medicaid more quickly and preserve the asset. For example, in many circumstances your home is a non-countable asset. If you use cash on hand to make improvements to your home, you may convert a countable asset to a non-countable asset. Keep in mind that this protection may only be temporary if Medicaid can recover the asset from your estate after your death.

• Gifting. Provided that you make gifts at least five years before you apply for Medicaid, gifting is the simplest method to remove countable assets from your estate. The downside is that gifting permanently removes the asset from your control and makes it unavailable to you for future needs. Gifting to someone with the expectation that they will allow you to use the asset or return it in the future is very risky.

• Trusts. One of most important estate planning tools you can use is an “irrevocable” trust — a trust that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the “grantor”) for life, and the principal cannot be applied to benefit you or your spouse. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home. And to avoid Medicaid’s “look-back period,” the trust must be funded at least five years before applying for benefits.

• Annuities. Annuities are another tool married couples can use to prepare for Medicaid. An immediate annuity, in its simplest form, is a contract with an insurance company under which the policyholder pays a certain lump sum of money to the insurer and the insurer sends the policyholder a monthly check for the rest of his or her life. As long as the annuity income is in the name of the spouse who is not in the nursing home, it is considered non-countable. Wisconsin has strict requirements related to Medicaid eligibility and annuities. These requirements may include listing Wisconsin’s estate recovery program as a remainder beneficiary after you or your spouse’s death. You should speak with your attorney before you purchase or make changes to an annuity, if you think you might require long term care within the next five years.

• Protecting your Home. After a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient’s care. This is called “estate recovery.” For most Medicaid recipients, their house is the only asset available, but there are steps you can take to protect your home. Putting your house in a trust can be a good option, but once a house is placed in an irrevocable trust, you cannot remove it. Another option that provides limited protection is a life estate. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. In Wisconsin, the value of the life estate may be subject to estate recovery. Also, if the home is sold during the life estate holder’s lifetime, the sale proceeds must be divided between the life estate owner and the remainder owner.

Talk to your attorney about whether your estate plan should include preparation for Medicaid eligibility.