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Joan and Harry were childhood sweethearts and have been happily married for 55 years. However, several years ago, Harry was diagnosed with Alzheimer’s disease. Despite Joan’s devotion and care, the disease is progressing, and soon Harry will need to relocate to a memory care unit for more extensive long-term care. After the death of Joan’s father, she received a hefty inheritance and wisely invested it, although with the significant cost of Alzheimer’s care, the money would be spent fairly quickly. Upon much reflection, and a feeling of deserting her husband after a promise to love him “in sickness and in health”, Joan has come to the revelation that divorcing Harry, “on paper”, is the only way to preserve her assets for herself and as an inheritance for their children.
What is a Medicaid Divorce?
Very simply stated, a Medicaid divorce is the dissolution of a marriage in which one spouse requires long-term care Medicaid. Medicaid divorce is intended to protect assets for the non-applicant spouse, also called the healthy spouse or community spouse. By divorcing, a community spouse may be able to receive a greater portion of the couple’s assets. This not only protects assets for the non-applicant spouse, but it also lowers the countable assets of the applicant spouse. Unfortunately, like in the example above, some couples may feel that this is the only plausible solution when one spouse requires long-term care. This is because without Medicaid assistance, the couple will quickly deplete their assets on long-term care, leaving the non-applicant spouse with little from which to support themself. However, Medicaid divorce is no longer relevant for the majority of these couples (as detailed below). It also is generally not a worthwhile strategy for couples who have less than half a million dollars in assets.
Medicaid divorce is not relevant for regular Medicaid, often called Aged, Blind and Disabled (ABD) Medicaid. This is because with ABD Medicaid, although personal care assistance and other supportive services may be provided, extensive and costly long-term care is not covered. Instead, Medicaid divorce is relevant for couples in which one spouse requires nursing home Medicaid (institutionalization Medicaid) or home and community based services (HCBS) via a Medicaid waiver. Supportive services and benefits available via HCBS waivers are intended to prevent and / or delay the need for nursing home care. This may include in-home personal care assistance, adult day care, assisted living services, adult foster care, and home health care.
To start a discussion of Medicaid divorce, it is important to mention that limited income and assets are required for a senior applicant to be eligible for Medicaid. In 2022, these limits vary by state, but as a general rule of thumb, the income limit for a single applicant requiring long-term care is 300% of the Federal Benefit Rate, $2,523 / month, and the asset limit is $2,000. See financial eligibility criteria by state, as well as assets that are not counted towards the limit.
For the purposes of Medicaid divorce, income is not relevant. This is because when only one spouse of a married couple applies for long-term care Medicaid (nursing home Medicaid or a HCBS Medicaid waiver), only their income is considered. Stated differently, the income of the non-applicant spouse is disregarded completely. More on how Medicaid counts income.
The assets of a married couple are considered to be jointly owned, although the non-applicant spouse is able to retain a higher figure. This means, that as a couple, assets must be “spent down” to a specific threshold in order for the applicant spouse to meet the asset qualification. This can be done by paying off credit card and mortgage debt, making safety and accessibility home modifications, paying out-of-pocket for long-term care, and even going on vacation.
When reducing assets to meet the limit, it is of the utmost importance that assets are not given away, even to charity, or sold for under fair market value. This is due to the 60-month Medicaid look-back rule, in which past asset transfers are scrutinized. California has a more lenient “look back” of 30 months. New York does not currently have a look back period for long-term home and community based services, but the state plans to begin phasing in a 30-month “look back” in 2022. Violating the look-back period is cause for Medicaid disqualification for a period of time.
What are Spousal Impoverishment Rules and How are They Relevant?
Medicaid divorces are not as common as in the past. This is because of spousal impoverishment provisions, which were enacted by the federal government in 1988. Spousal impoverishment rules allow community spouses to retain a higher level of income and assets than their applicant spouses. This is to prevent poverty of non-applicant spouses, which was a real issue prior to the establishment of these provisions.
These rules apply to a married couple (including same sex couples) in which just one spouse is seeking long-term care Medicaid. Initially, states were only required to enact these rules when one spouse of a married couple sought institutionalization (nursing home) Medicaid. States were not required to extend the spousal impoverishment rules to a couple with just one spouse applying for a Home and Community Based Services (HCBS) Medicaid waiver. However, since January 2014, spousal impoverishment rules for HCBS Medicaid waivers have been mandatory for all states. Currently the protections are set to expire in 2023. If this happens, states will be able to choose if they would like to extend these rules to HCBS waivers.
Community Spouse Resource Allowance
Relevant to a Medicaid divorce, the Community Spouse Resource Allowance (CSRA) protects a certain amount of assets for non-applicant spouses. As mentioned above, assets of a married couple are considered jointly owned. Generally speaking, as of 2022, up to $137,400 in assets can be preserved for a non-applicant spouse, while the applicant spouse is able to keep up to $2,000 in assets.
Minimum Monthly Maintenance Needs Allowance
Not relevant for the purposes of Medicaid divorce, but worth a mention, is the Minimum Monthly Maintenance Needs Allowance (MMMNA). This rule allows applicant spouses to transfer a portion of their income to their non-applicant spouses. Basically, this rule sets a minimum amount of income to which a non-applicant spouse is entitled. In most cases, this amount is $2,177.50 / month (effective July 2021 – June 2022). Based on shelter and utility costs, a non-applicant spouse may be entitled to an even higher monthly income allowance. This amount, in 2022, may be as much as $3,435 / month.
Why Get a Medicaid Divorce?
Initially, Medicaid divorces were happening because the financial burden of long term care was too significant for a couple, and it would leave the non-applicant spouse in poverty. However, with the enactment of the spousal impoverishment rules to prevent healthy spouses from becoming impoverished, Medicaid divorces are less common. Still, in cases where a couple has significant countable assets, generally more than $500,0000, Medicaid divorce continues to be used for the preservation of assets for the community spouse. Secondary, it is used to protect assets for future inheritance.
Which States Allow a Medicaid Divorce / Should You Get One?
The answer to, “which states allow a Medicaid divorce”, is not a simple one. First, the divorce laws in the state in which one resides have to be considered. To further explain this, the topic of separate property states versus marital property states must be discussed. These designations are a classification of assets, and in separate property states, specific assets are considered to be owned only by one spouse. Examples include property that was owned by one spouse prior to marriage, an inheritance received by one of the spouses that has not been combined with marital assets, such as depositing the inheritance into a joint bank account, and gifts received from someone other than the other spouse, such as a diamond necklace from a great aunt. Aside from a few other exceptions, all other property is generally deemed marital property. Particularly relevant to this article is that retirement accounts are considered to be marital property, and this is where the majority of a person’s assets is generally held.
Also relevant is how marital property is divided in one’s state, as there are community property states and equitable distribution states. Community property states require equal distribution, which means that a Medicaid divorce is not applicable. These states require all assets “acquired” during the marriage to be split 50 / 50. These states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. The remainder of the states are equitable distribution states, and for a Medicaid divorce to be feasible, one must live in an equitable distribution state. In these states, marital property is divided “fairly”, although this does not automatically equate to 50 / 50. Stated differently, one spouse may receive a higher percentage of marital assets than the other spouse, which is the intention of a Medicaid divorce.
Another piece of the puzzle as to whether Medicaid divorce is a good option in the state in which one resides is how Medicaid views the IRA of the community spouse. Put differently, is the community spouse’s IRA exempt from the asset limit? If the IRA is counted towards the asset limit, it must be “spent down” to reach Medicaid’s asset limit.
|Medicaid Divorce Relevance by State (Treatment of IRAs) – Updated Jan. 2022|
|IRAs are Counted as Assets for Both Spouses||Only the Applicant’s IRA is Counted as an Asset||Neither Spouses’ IRA is Counted as an Asset|
†The applicant spouse must be taking the required minimum distribution (RMD) for the IRA to be exempt. The non-applicant spouse’s IRA is automatically exempt.
‡The applicant spouse and non-applicant spouse must be taking the RMD for IRA exemption.
§Current Ohio laws indicate that the IRA of an applicant spouse and non-applicant spouse are exempt if the RMD is being taken. Per old rules, the IRAs of both spouses were counted as assets, regardless of if the owner was taking the RMD. Some OH counties are still applying old rules and count an applicant and applicant spouse’s IRA towards the asset limit.
Alternatives to a Medicaid Divorce
While in some situations, Medicaid divorce may be the most plausible solution, for the most part, there are other planning strategies that can be used instead. One such option is to purchase a Medicaid-compliant annuity, which converts a lump sum of cash into a monthly stream of income. Irrevocable funeral trusts, which allows one to pay for funeral and burial expenses in advance, provide another way to convert countable assets into exempt ones. Another option, although only utilized in New York and Florida, is spousal refusal, in which the non-applicant spouse refuses to contribute towards the cost of their spouse’s long-term care.
If you are considering a Medicaid divorce, or are married, have excess assets, and your spouse requires long-term care Medicaid (or vice versa), it can be extremely beneficial to contact an experienced Medicaid planner. These professionals are well skilled in restructuring and protecting assets and offer the best chance of Medicaid eligibility without the need of a Medicaid divorce. Find a professional Medicaid planner here.