When the need for long-term care arises, most people fear that they cannot afford to privately pay the cost of a skilled nursing facility, yet assume that they make too much money or have too many assets to qualify for long-term care Medicaid. Those with a few assets have often been told to “spend down” their assets (i.e. spend everything they have paying for care) and then apply for Medicaid.
Fortunately, there are a variety of Medicaid-approved techniques for preserving a portion of an individual’s assets, while simultaneously obtaining Medicaid eligibility. An effective asset protection plan avoids the need for this “spend down” of assets.
To qualify for long-term care Medicaid for a skilled nursing facility, the individual must have no more than $2000 in countable assets in his/her name. The individual’s monthly income must be less than the cost of the facility in which he or she will be receiving care.
Additionally, there is a five-year lookback period. If, during the five years preceding the filing of the Medicaid application, the individual has transferred any property out of his or her name without receiving fair market value in return, it is considered to be a gift and a penalty is assessed. The penalty is the length of time the individual must privately pay the facility before Medicaid benefits will begin. For every $6300 worth of assets that is transferred, a one month penalty is applied. This penalty period does not start to run until after the applicant is otherwise eligible for Medicaid.
Asset Protection Techniques
For most single individuals, it is possible to preserve 30%-50% of the Medicaid applicant’s assets, protect the home, and still qualify for Medicaid. Common techniques include: purchasing exempt assets, paying Medicaid-allowable expenses, engaging in a combination gifting/loaning strategy, and utilizing a special deed for ownership of the primary residence.
Purchasing Exempt Assets
Some of an individual’s assets count towards the $2000 limit and some do not. Assets that are not countable are referred to as exempt assets. Examples of exempt assets include:
- Primary residence with equity up to $560,000
- One vehicle of any value
- Irrevocable funeral contracts
- One burial plot
Most other assets, such as money in bank accounts, investment accounts, IRAs, other vehicles, boats, and cash value of life insurance policies, are countable. By using a countable asset, like money in a checking account, to purchase an exempt asset, like an irrevocable funeral contract, the Medicaid applicant is obtaining something of equal value that he or she will be allowed to keep and still qualify for long-term care Medicaid.
Paying Medicaid-Allowable Expenses
When working toward Medicaid qualification, an individual may wish to use excess assets to pay off existing debts or for other Medicaid-allowable expenses such as:
- Paying down on an existing mortgage
- Paying off loans or credit card balances
- Paying legal fees for assistance with Medicaid eligibility
- Making repairs or renovations to the primary residence
- Paying upcoming property taxes
- Paying for elective or non-covered medical or dental procedures
Using assets for any of these purposes is acceptable and will not subject the applicant to a Medicaid transfer penalty.
Gifting and Loaning Using Medicaid-Compliant Promissory Note
After paying off debts and purchasing exempt assets, the remainder of an individual’s countable assets in excess of $2000 can be removed from his or her name utilizing gifting combined with a Medicaid-compliant promissory note.
Using the difference between the individual’s income and the private pay cost of the facility, Medicaid’s penalty divisor, and total value of excess assets, the attorney calculates how much the individual can afford to gift while still setting aside sufficient assets to pay through the penalty period that will be created by making that gift. The assets needed to pay through the penalty period are then loaned to someone (usually the Medicaid applicant’s agent under the power of attorney), who signs a Medicaid-compliant promissory note. Each month, the agent pays the loan payment to the Medicaid applicant, who then privately pays the facility.
Through this strategy, the excess assets are immediately removed from the Medicaid applicant’s account via two checks; one for the gift amount and one for the loan amount. That drops the countable assets below $2000 making the individual financially qualified. Once he/she moves into the skilled nursing facility, the penalty period begins to run. The amount of the gift is the value of assets preserved through the gift/Medicaid-compliant promissory note technique.
Protecting the Home
As previously discussed, the Medicaid applicant’s primary residence is exempt, so continued ownership does not prevent Medicaid eligibility. However, if the property remains solely in the name of the Medicaid applicant, the home is subject to estate recovery whereby, after the person’s death, Medicaid can place a lien against the person’s estate to recover the cost of benefits paid. This can be avoided by changing the deed.
If the individual were to put the home entirely in someone else’s name, the entire value of the home would be considered a gift, subject to the transfer penalty. Instead, the Medicaid applicant can elect to gift or sell 1% of the home to someone else, usually an adult child. A new deed is prepared and the 99% owner and the 1% owner hold title as joint tenants with right of survivorship. This type of deed has special legal significance. Upon the death of one owner, the other owner, by operation of law, absorbs the deceased person’s interest. So if the Medicaid applicant who owns 99% dies, the 1% owner automatically becomes 100% owner. This keeps the home out of the Medicaid beneficiary’s estate, thereby preventing Medicaid from having anything to which to attach a lien. Thus, the home is fully protected. If the 1% was gifted rather than sold, the Medicaid applicant incurs a penalty only on 1% of the home’s value.