Introduction
While seniors commonly make financial transactions, such as for estate planning, paying for care out-of-pocket or even gifting a loved one, some of these transactions could negatively impact one’s eligibility for Medicaid-funded long-term care. These transactions may seem harmless, but without knowledge of Medicaid’s complex rules, one may unintentionally jeopardize their Medicaid eligibility or even disqualify themself for a period of time. Therefore, an awareness of Medicaid’s financial eligibility criteria, along with knowledge of common financial “mistakes” seniors unknowingly make, and alternative options, is vital.
Medicaid’s Financial Eligibility Rules
For long-term care Medicaid eligibility, seniors must have limited financial means. While there is both an income limit and an asset limit, relevant to this discussion is Medicaid’s asset limit. In most states, it is $2,000 for a single applicant. Not all assets, however, are counted towards this limit. For instance, one’s primary home, household furnishings and appliances, vehicle, and personal items generally are exempt (not counted). Seniors are often unaware of which assets are counted (and which are not) nor are they aware of the rules surrounding when an asset is counted (or is not counted). Therefore, seniors may make a financial transaction that will count towards Medicaid’s asset limit.
To discourage seniors from “gifting” assets to become asset-eligible, there is a 60-month Medicaid Look-Back Period, which immediately precedes one’s long-term care Medicaid application. During the “look back”, the Medicaid agency scrutinizes all asset transfers to ensure no assets were gifted, including selling an asset for under fair market value. If this has been done, a Penalty Period of Medicaid ineligibility will be established. Without an awareness of the Look-Back Rules, seniors may unknowingly violate the Look-Back Period when making a financial transaction. Seniors who have violated this rule and apply for long-term care Medicaid while the Look-Back Period is still in effect are penalized.
Common Financial “Mistakes” Seniors Make
Below are common financial transactions that a senior makes, and unfortunately, can jeopardize one’s long-term care Medicaid eligibility.
Creating a Totten Trust
Totten Trusts are a type of revocable trust, which means the terms of the trust can be changed or the trust can be revoked altogether. Also called a Payable-On-Death Bank Account, a Totten Trust, is a type of bank account with a named beneficiary. This allows one to easily transfer cash (and only cash) to a loved one upon their death. The person who creates the Totten Trust is the trustee, who manages the funds for the benefit of someone else (the beneficiary).
While Totten Trusts are a great estate planning tool, they are not suitable for persons who require Medicaid long-term care. Since the trust is revocable, funds in the trust are available to the Medicaid applicant, and the funds in their entirety are counted towards Medicaid’s asset limit. Therefore, a Totten Trust will not protect assets from Medicaid’s asset limit.
There is, however, an alternative planning strategy. A Medicaid Asset Protection Trust (MAPT) can be used to protect assets from Medicaid’s asset limit, as well as Medicaid’s Estate Recovery Program. In other words, MAPTs allow seniors to protect their assets for their family as inheritance rather than be taken by Medicaid as reimbursement for long-term care costs. While this strategy violates Medicaid’s Look-Back Rule, it is generally implemented well before the need for long-term care.
Paying for Care Without a Family Caregiver Contract
While a senior who requires assistance with personal care and / or homemaker tasks might pay their adult child, grandchild, or another loved one to help them, doing so could violate Medicaid’s Look-Back Rule. Medicaid might consider the money exchanging hands to be a “gift” rather than payment for services. To resolve this, one should have a Family Caregiver Contract, also called a Personal Care Agreement, in place prior to paying a loved one to provide care.
A Family Caregiver Contract is a written agreement that establishes the relationship between the senior (the care recipient) and caregiver. It provides proof that the money is being paid in exchange for care provided. Note that it is vital that the amount of pay, which is also established in the contract, be reasonable for the area in which one lives. If a senior is paying more than the average current rate, Medicaid could consider the “extra” amount as a gift. Even if one does not anticipate the need for Medicaid-funded care in the future, a Family Caregiver Contract is a safeguard a senior should have in place.
Gifting Money to Loved Ones
It is common for seniors to gift money to a loved one without a second thought. For instance, they might give money to their adult child to help them out of a crunch or gift money to their newly graduated grandchild to do with it whatever they wish. While the IRS has a Gift Tax Exclusion of $18,000 / year (in 2024) per recipient, which allows one to gift up to this amount without reporting it to the IRS, this exemption does not extend to Medicaid eligibility. Gifting money is a violation of Medicaid’s Look-Back Rule.
There may, however, be a little lead way. There are a few states that allow one to gift a minimal amount of money without violating Medicaid’s Look-Back Period. For instance, Indiana allows up to $1,200 / year to be gifted to a relative (via blood, adoption, or an existing marriage) without impacting Medicaid eligibility. Pennsylvania is another exception; the state allows up to $500 / month to be gifted without violating the Look-Back Period. However, one should never gift money without a full awareness of Medicaid Look-Back Rules in their state.
Selling One’s Home Under Fair Market Value
While one’s home is generally exempt from Medicaid’s asset limit, if they sell it, the proceeds are counted towards Medicaid’s asset limit. For persons who want use the funds to pay for long-term care or purchase another home, this isn’t usually an issue. However, if they sell their home for less than fair market value and later apply for long-term care Medicaid, this is a violation of the Look-Back Period. Essentially, the difference between the home’s fair market value and the amount received is considered a “gift”.
Seniors should avoid selling their home to a “we buy houses” company. While they promise a quick cash sale for a home “as-is”, they buy homes at a low price. Selling one’s home in this manner would more likely than not, violate Medicaid’s Look-Back Period. Another mistake that seniors make is to sell their home to their adult child for a “deal”. Unfortunately, this also violates Medicaid’s Look-Back Rule, given it is sold for under fair market value.
Putting One’s Home in a Revocable Living Trust
While one’s home is generally not counted towards Medicaid’s asset limit, putting it in a revocable Living Trust could cause the home to lose its exempt status and be counted towards Medicaid’s asset limit. A Living Trust, which is created and given effect when the person establishing the trust is alive, is also called an Inter Vivos Trust. Living Trusts are often revocable, which means the terms of the trust can be changed or terminated. Often, they are used as an estate planning tool to help family members avoid probate court: a legal process in which a deceased person’s will is validated and their assets distributed accordingly.
While not all states count a home in a revocable Living Trust towards Medicaid’s asset limit, many states do. Furthermore, this topic is very complicated and state policy is not always clear. Seniors who have their home in a revocable trust may be able to transfer their home back into their name and their home return to an exempt status. However, it is highly recommended that one’s home not be placed in a revocable Living Trust if Medicaid may be required in the future.
An alternative planning strategy for persons wishing to protect their home for family as inheritance is a Medicaid Asset Protection Trust (MAPT). MAPTs violate Medicaid’s Look-Back Period, and therefore, should be implemented 60-months prior to applying for long-term care Medicaid.
Purchasing a Whole Life Insurance Policy with a High Face Value
Seniors commonly purchase a life insurance policy to ensure that following their death, their loved ones are financially comfortable. When it comes to Medicaid eligibility, however, purchasing a Whole Life Insurance policy can jeopardize one’s eligibility. Whole Life Insurance policies generally provide lifelong coverage, given the monthly or annual premiums continue to be paid. However, the policy accumulates cash value, which the policyholder can borrow against or “cash out” (terminate the policy). Due to this, Whole Life Insurance policies may count towards Medicaid’s asset limit.
In most states, Medicaid will disregard (not count) a Whole Life Insurance policy up to a face value of $1,500. If one has more than one policy, it is a combined face value of $1,500 that is permitted; it is not a face value of $1,500 per policy. If one’s policy, or combination of policies, exceed $1,500, the cash surrender value of the policy (or policies) is counted towards Medicaid’s asset limit. Face value, also called the death benefit, is the amount that the policy will pay out to one’s beneficiaries if the policyholder dies while the policy is in effect. Cash surrender value is the amount the policyholder would receive if they terminated the policy.
Seniors can, however, purchase Term Life Insurance, which does not impact their Medicaid eligibility. This type of policy provides coverage for a limited period, typically between 10 and 30 years. No cash value is built, and therefore, there is no money to borrow against or cash out. For this reason, it is not counted towards Medicaid’s asset limit.
Purchasing a Tax-Deferred Annuity
An annuity is a financial transaction that takes a lump sum of assets and turns them into a stream of income. While there are several types of annuities, a Tax-Deferred Annuity or Deferred Annuity, is counted towards Medicaid’s asset limit. With a Deferred Annuity, payments do not start immediately. Instead, the funds that are put into the annuity are invested and grown. It is often several to many years before one begins receiving payments. Deferred Annuities are revocable, which mean they can be canceled and the funds removed. Due to this, they count towards Medicaid’s asset limit.
Medicaid does, however, permit an Immediate Annuity, which begins paying out immediately and does not accumulate a cash value. This type of annuity is irrevocable; it cannot be terminated nor can funds be taken from it. In order to be Medicaid-compliant, one must adhere to strict rules, such as payments must be “fixed”. This means the payments must be for the same amount each month. Seniors often use an Immediate Annuity as a Medicaid planning strategy to lower one’s countable assets and become asset-eligible.
Consult a Professional Medicaid Planner
Seniors who require long-term care Medicaid and have unknowingly violated Medicaid’s Look-Back Rule, or think they may have violated it, should contact a Professional Medicaid Planner for assistance. These professionals are knowledgeable about Medicaid policy and state-specific rules. In some cases, there may be a workaround. If one has excess assets due to purchasing a Whole Life Insurance policy or Tax-Deferred Annuity, a Medicaid Planner can assist in implementing Medicaid planning strategies for one to become asset-eligible. For instance, a Tax-Deferred Annuity can be converted into an Immediate Annuity. Find a Medicaid Expert.