What is Estate Planning & Why it is Critical for Medicaid Planning

Last updated: August 13, 2020


What is Estate Planning for Medicaid?

Medicaid estate planning allows long term care Medicaid applicants to meet Medicaid’s asset limit for eligibility purposes, while also legally protecting assets (also called resources) for family and loved ones for future inheritance. It might be thought that Medicaid applicants have a minimal estate to protect and pass on, but it would be wrong to assume this. Everyone has an estate, even Medicaid beneficiaries.


Difference Between Estate Planning and Medicaid Planning

Estate Planning
With estate planning, persons set up their estate in a manner that safeguards and manages their assets for named beneficiaries, while also minimizing the amount of estate taxes that the beneficiaries must pay. Stated differently, an estate plan sets forth a plan of what one wants to happen to their estate after his / her death.

As part of an estate plan, a will (a legal document that declares how one wishes to have their estate distributed after death) is written and an “executor” named to manage one’s remaining estate and ensure the deceased’s wishes are carried out. A financial durable power of attorney is also set up, which is a legal document that names a person to make decisions on his / her behalf if he / she becomes mentally incapacitated. Furthermore, trusts may be established in the name of the beneficiaries to limit estate taxes or charitable donations may be made to serve the same purpose. As a side note, not all estate planning strategies are appropriate for Medicaid planning. However, a part of estate planning should be planning for the possibility of one requiring long term care Medicaid in the future.

Medicaid Planning
With Medicaid planning, assistance may be provided with the Medicaid application process and the gathering of required documentation. However, the main goal is to speed up the process of meeting Medicaid’s financial eligibility requirements in order to maximize benefits and savings on long term care.

While Medicaid has both income and asset limits for qualification purposes, being over the limit(s) does not mean that one cannot qualify for Medicaid. (To see state-by-state eligibility criteria, click here). A part of Medicaid planning is implementing planning strategies in order to get income and assets under the limit(s) without jeopardizing one’s Medicaid eligibility. Furthermore, Medicaid planning can aid applicants in protecting assets (one’s estate) for family as inheritance. Therefore, estate planning (in some aspect) may be a part of Medicaid planning.


Why Do Estate Planning in Advance of the Need for Medicaid?

A Medicaid applicant must have income and assets under a specified amount in order to be eligible for long term care Medicaid. However, if estate planning activities are conducted well in advance of the need for Medicaid long term care, a family is able to protected many of their assets. For a deeper understanding of the importance of doing Medicaid estate planning prior to the need for care, it is important to understand some Medicaid related terms.

Medicaid Asset Limit
For Medicaid eligibility purposes, in 2020, the asset limit (the amount of assets an applicant is allowed to have) is generally $2,000, although there is some variance based on the state in which one resides. Furthermore, some assets are exempt (not counted) from the asset limit. As an example, one’s primary home is usually exempt.

Asset Spend Down
When an applicant has “excess” assets (assets over Medicaid’s limit), he / she must “spend down” the excess assets in order to meet Medicaid’s asset limit. Spending down assets might including paying for long term care out of pocket, paying off debt, purchasing an irrevocable funeral trust, making modifications to one’s home, or even going on a vacation. While “spending down” assets allows a way for an applicant with excess assets to meet Medicaid’s asset limit, it does not protect assets for family and loved ones as inheritance. Furthermore, excess assets cannot simple be given away to family or sold under fair market value during asset spend down. This is because Medicaid has a look back period, which is discussed in the next section. However, participating in Medicaid estate planning in advance can allow a future applicant to turn countable assets into exempt assets while preserving them for family.

Look Back Rule
The look back rule is a timeframe in which Medicaid scrutinizes all past asset transfers for gifted assets / assets sold under fair market value immediately preceding the date of one’s Medicaid application. While the majority of the states have a 60-month look back period, California and New York are exceptions in that they have a 30-month look back period. Unfortunately, violating the look back rule is cause for Medicaid disqualification for a to-be-determined amount of time. Also, unfortunately, many estate planning strategies are in violation of Medicaid’s look back rule, which means it is vital that they be implemented well in advance of the need for long term care Medicaid.

Medicaid Estate Recovery Program (MERP)
Every state has a Medicaid estate recovery program in which Medicaid attempts to collect reimbursement for long term care costs it paid for a Medicaid beneficiary following his / her death. The home is generally the highest valued asset remaining, and it is often through forcing the sale of the home that the state tries to be compensated. Note that if a home is occupied by spouse, the state cannot force a sale.

While one’s home is generally exempt from Medicaid’s asset limit, it is usually not safe from Medicaid’s estate recovery program unless Medicaid estate planning strategies have been implemented. Many planning strategies to protect the home from MERP and to protect it as inheritance for family violate the look back period, and again, highlight the importance of Medicaid estate planning in advance.


Estate Planning Strategies for Medicaid

There are a variety of estate planning techniques that can be utilized to protect assets for family as inheritance. However, several of these options, as mentioned previously, violate Medicaid’s look back period, which means they must be implemented well in advance of the need for long term care Medicaid. Furthermore, some of these strategies may not be allowed in all states.

Medicaid Asset Protection Trusts (MAPTs) 
MAPTs offer a way to turn non-exempt (countable) assets into non-countable assets for Medicaid qualification purposes and also serves to protect the home from Medicaid’s estate recovery program (MERP). Remember, via MERP, the state attempts to collect reimbursement for long-term care expenses it paid for a former Medicaid beneficiary who has passed away.

With a MAPT trust, the trustmaker’s assets, including his / her home, are transferred to the trust and a trustee (person who manages the trust) and beneficiary (person who inherits the trust after the trustmaker’s passing) are named. The trust must be irrevocable, which means a trustmaker cannot make changes to or cancel the trust. Furthermore, funds in the trust cannot be used on the trustmaker. While the assets in the trust no longer belong to the trustmaker, he / she can continue to live in his / her home until death. Please note that this estate planning strategy violates Medicaid’s look back rule.

Modern Half a Loaf Strategy 
With this planning strategy, one calculates the total amount of his / her “excess” assets (countable assets over Medicaid’s asset limit) and then gives approximately half of the assets to relatives or other loved ones. With the remaining “excess” assets, a short-term annuity is purchased. (An annuity is a financial contract between the purchaser and an insurance company in which a lump sum of money, essentially assets, is converted into an income stream. Learn more about Medicaid compliant annuities here.)

Since the individual no longer has assets over Medicaid’s limit, he / she should apply for Medicaid, but expect to be penalized with a disqualification period for gifting assets. While the Medicaid half a loaf strategy violates the look back period (specifically, the gifting of assets), the income from the annuity is intended to cover the cost of long term care during the penalization period.

Spousal Refusal 
Spousal refusal, which is only practiced in New York and Florida, is the refusal of a non-applicant spouse (also called a community spouse) to help cover the cost of long term care for his / her applicant spouse. Legally, spouses are required to support each other financially, but even so, Medicaid is unable to refuse long term care on the basis of one’s spouse refusing to provide financial assistance. Additionally, per federal Medicaid law, community spouses have the right to keep their assets and refuse to use them to support their applicant spouses.

With this estate planning strategy, assets over Medicaid’s asset limit are transferred from the Medicaid applicant to the non-applicant spouse. (This does not violate Medicaid’s look back rule, as spouses are able to transfer assets between each other without penalty). There is, however, some risk that the Medicaid agency will sue the non-applicant spouse for refusal to make his / her assets available to help cover the applicant spouse’s cost of long term care.

Medicaid Divorce 
Medicaid divorce is the legal ending of a marriage when one spouse requires Medicaid long term care. This estate planning technique is intended to prevent a couple from spending nearly all their assets on care costs, and instead, protects a higher amount of assets for a non-applicant spouse. Medicaid divorce is no longer as common as it was once due to spousal impoverishment rules, which are intended to prevent non-applicant spouses of long term care Medicaid applicants from becoming poverty stricken in order for their spouses to become Medicaid eligible. Generally, Medicaid divorce is not necessary or advisable, but in some cases may be a preferred strategy. More.

Gifting Assets Prior to Medicaid’s Look Back Period
In addition to the strategies mentioned above, one could outright gift assets to loved ones. However, it is extremely important that this be done well in advance of the projected need of long term care Medicaid. This is because gifting countable assets is in violation of Medicaid’s look back rule.


Who Provides Medicaid Estate Planning Services?

While one might think an estate planning attorney is needed to implement estate planning strategies for Medicaid planning, this is not true. In addition to estate planning attorneys, some eldercare financial advisors, as well as some Medicaid planners provide Medicaid estate planning services. However, there are pros and cons with working with all of these professionals.

Estate Planning Attorneys
Estate planning attorneys main focus is on one’s estate, managing and preserving it, and implementing planning strategies to minimize taxes beneficiaries will have to pay. Although they may have some knowledge surrounding Medicaid’s eligibility criteria, look back rules, and Medicaid-compliant estate planning strategies, their knowledge is generally more limited than that of a professional Medicaid planner. Stated differently, the main focus of an estate planning attorney is not Medicaid planning.

Medicaid Planners
Medicaid planners are extremely knowledgeable when it comes to all things Medicaid related. They help clients in restructuring their income and assets in order to meet the financial requirements and gain eligibility. Furthermore, they can assist persons in planning techniques that preserve assets for family as inheritance, as well as protect one’s home from Medicaid’s estate recovery program. That said, unlike estate planning attorneys, Medicaid planners do not do advanced estate planning. However, it is not uncommon for a professional Medicaid planner to work closely with an estate planning attorney in certain situations.

Eldercare Financial Planners
Eldercare financial planners help seniors put together a financial plan to downsize their resources in preparation to potentially pay for long term care. They can also aid in protecting assets from Medicaid “spend down”. Essentially, they manage a person’s finances and have a vast understanding of financial matters. Their expertise, however, is neither Medicaid planning nor estate planning.

 Self Planners Beware: It is not advisable that one tries to implement Medicaid estate planning strategies without professional assistance. This is because the rules that govern Medicaid eligibility, as well as Medicaid estate planning strategies, vary based on the state in which one lives, with marital status and even veteran status in some states. Furthermore, one’s specific circumstances need to be taken into account. Find a professional Medicaid planner here.


How Much Does Medicaid Estate Planning Cost?

Professional Medicaid planners generally charge $3,000 – $8,000 for Medicaid estate planning, while the cost to hire an estate planning attorney is greater. Financial advisors, rather than charge a set fee, generally base the cost of estate planning on the percentage of the total value of one’s financial portfolio. For those who already have a financial advisor, it is suggested they inquire with their advisor first about Medicaid estate planning. Financial advisors will not take on a new client for the sole purpose of Medicaid estate planning. For all others, contacting a professional Medicaid planner is advised. Begin your search.

Please note that while the cost might initially seem high, hiring a Medicaid estate planning professional can not only help one qualify for long term care Medicaid, but also preserve many more thousands of dollars (as well as one’s home) for family as inheritance.

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