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Even if you have never needed to rely on Medicaid before to help with your health care costs, the odds are good you will need to as a senior. Why? The answer can be found in the high cost of long-term care (LTC). At an average yearly cost of over $80,000 nationwide, and an average length of stay of 2.5 years, it should come as no surprise that over half of all seniors in need of LTC rely on Medicaid to help cover the cost of care. Given the likelihood that you (or a spouse) will need to qualify for Medicaid at some point in the future, a basic understanding of the Medicaid assets transfer rules is crucial. Gifting assets can cost you if you don’t understand the rules.
Qualifying for Medicaid
Medicaid is a health care program that is primarily funded by the federal government, but is administered by the individual states within federal guidelines. Consequently, the eligibility and benefits offered can vary somewhat from state to state. Because Medicaid is a “needs-based” program, all states use income and asset limits when determining eligibility. For a single person, if the value of your available resources exceed the program limit, typically $2,000, you do not qualify. If you are married, there is a gap on your spouse’s assets too. A hasty transfer of assets in anticipation of the need to qualify for Medicaid, however, is not the answer if your assets exceed the limit because of the Medicaid five-year “look-back” rules.
Medicaid Look-Back Rules
There was a time when you could transfer assets at the point when you realized you needed to qualify for Medicaid without incurring sanctions. However, changes to the Medicaid eligibility rules now make that impossible. Medicaid now uses a five-year “look-back” rule when evaluating applicants. The rule allows Medicaid to review your finances for asset transfers during the five-year period prior to your application. Transfers made for less than fair market value, “uncompensated transfers,” will cause a penalty period of disqualification starting when the applicant would be otherwise qualified to receive and in need of Medicaid benefits. The length of the disqualification period is determined by dividing the uncompensated transfer by the average monthly cost of LTC private pay in your area.
For example, imagine you have uncompensated transfers of $118,000 and the average monthly cost of LTC in your area is $8,000. You would divide $118,000 by $8,000 for 14.75. Rounding up, your disqualification period would be 15 months. During that time, you would not be qualified for Medicaid.
If you find that you (or a spouse) need to qualify for Medicaid, and your non-exempt assets exceed the asset limit, you may be able to implement a Medicaid “spend-down strategy” that involves spending your excess assets on things that will effectively lower your non-exempt asset total. Examples of things that may qualify include:
- Paying down or paying off a mortgage on your principal residence
- Purchasing a new home
- Making home improvements
- Purchasing household furnishings
- Purchasing a new car or making car improvements
- Purchasing pre-paid funeral plans
Keep in mind the rules regarding what can be part of your spend-down strategy will vary somewhat depending on your state of residence. Be sure to consult with an experienced estate planning and elder law attorney before implementing a Medicaid spend-down strategy to ensure your planned expenses qualify.
The best way to ensure you qualify for Medicaid when you need it, without putting any of your retirement nest egg at risk, is to incorporate Medicaid planning into your comprehensive estate plan long before the need for Medicaid eligibility arises. Medicaid planning utilizes strategies and tools, such as an irrevocable Medicaid trust, to protect your assets and set you up for Medicaid eligibility. Consult with your estate planning and elder law attorney about adding a Medicaid planning component to your estate plan.
If you have additional questions about the Medicaid transfer rules, or you wish to know more about a Medicaid spend-down strategy, consult with your estate planning and elder law attorney.