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There are many income and asset planning techniques used to qualify for long-term care Medicaid when one is over the limit(s). There are also planning techniques available to protect one’s home from Medicaid’s estate recovery program. Some of these strategies are exceedingly complex, while others are surprisingly simple. While we don’t include all options here, we include those that are relevant to individuals looking for the most affordable way to qualify for Medicaid and protect their home. Most of the techniques described below can be undertaken with little to no financial or legal assistance. Find the most affordable option for getting planning assistance.
Asset Planning Strategies
Irrevocable Funeral Trusts
These are trusts set up for the purpose of paying for the Medicaid applicant’s funeral in advance. For applicants who have assets exceeding the countable limit, establishing an irrevocable funeral trust can reduce their countable assets by up to $15,000 (or up to $30,000 for married couples). Irrevocable means that the terms of the trust cannot be changed or canceled. Setting up this type of trust also prevents one’s family from having to shoulder the financial burden of a funeral and burial. The process of establishing an irrevocable funeral trust is fast, simple, and requires no legal fees.
Spousal Asset Transfers
When only one spouse of a married couple applies for nursing home Medicaid or a Home and Community Based Services (HCBS) Medicaid Waiver, certain spousal protections apply to ensure the community spouse does not become impoverished. The community spouse, also called a well spouse, is the non-applicant spouse. In 2022, the community spouse is permitted up to $137,400 in countable assets, while the Medicaid applicant is usually only allowed $2,000. Not all states use these figures. For instance, South Carolina limits the community spouse to $66,480 in assets, and Illinois limits them to $109,560. New York allows applicants up to $16,800 in assets, and Connecticut only allows applicants $1,600. Click here to see asset limits for the applicant spouse and non-applicant spouse by state.
The amount of assets that the well spouse is able to retain, which includes mutually held assets, is called the Community Spouse Resource Allowance (CSRA). In addition to preventing the non-applicant spouse from living in poverty, it can also effectively lower the applicant’s resources, hopefully to a Medicaid compliant level. This common technique is fairly simple and requires little to no outside assistance. As part of the Medicaid application process, the Medicaid agency assists in calculating the amount of the spousal resource allowance.
For married couples in which only one spouse applies for nursing home Medicaid or a HCBS Medicaid waiver, an annuity is a good option. This planning technique turns countable assets into non-countable income for the non-applicant / healthy spouse. In simple terms, a lump sum of money is paid to an insurance company, which in turn, will pay the healthy spouse a monthly payment. Annuities must be irrevocable (impossible to alter or terminate), must be immediate (payments start right away), and the monthly payments must not exceed the life expectancy of the recipient. Spousal annuities are not an option in all states.
For single applicants, an annuity is also a possibility. However, the income generated from the annuity is counted towards Medicaid’s income limit. Therefore, this is not always the best option or even a feasible one. More on annuities.
Spend Down Excess Assets
There are several ways in which one is able to spend down assets to reach the Medicaid asset limit. Options include making home modifications and improvements, such as adding a chair lift or putting on a new roof, purchasing medical devices that are not covered by insurance, like dentures, and paying off one’s mortgage or credit card debt. One may not gift assets or sell them under fair market value. This is because there is a 60-month Medicaid look-back rule, which immediately precedes one’s date of Medicaid application. During this period, the Medicaid agency reviews all past asset transfers, and if this rule has been violated, a penalty period of Medicaid eligibility will be established. California is more lenient with a 30-month “look back”. New York currently does not have a look back period for long-term home and community based services, but plans to implement a 30-month “look back” no earlier than March 31, 2024.
Put simply, a Medicaid divorce is the legal termination of a marriage of a couple in which only one spouse applies for long-term care Medicaid. While this strategy is used to protect assets for the non-applicant spouse, it also lowers the countable assets of the applicant spouse. However, since the establishment of spousal asset transfers (discussed above), Medicaid divorces are not nearly as common. This is because the spousal resource allowance allows the community spouse (non-applicant spouse) to retain a higher portion of the couple’s assets, preventing spousal impoverishment. In the case where a couple has significant assets, generally over half a million dollars, a Medicaid divorce may still make sense. Getting a divorce may reserve a significantly greater amount of assets for the non-applicant spouse instead of using them towards the cost of long-term care. This strategy is complicated, depends on the divorce laws in the state in which one resides, and cannot be used in all states.
Non-applicant spouses, while legally obligated to help cover the cost of Medicaid long-term care for their applicant spouses, can still refuse to make their assets available for this purpose. (Medicaid considers assets of either spouse as jointly owned for eligibility purposes). With “spousal refusal”, Medicaid cannot legally deny an applicant care when one’s spouse refuses to contribute towards care costs. Although uncommon, a state’s Medicaid agency can pursue a lawsuit against non-applicant spouses to collect reimbursement of long term care costs. This planning strategy has generally only been allowed in Florida and New York. More on Spousal Refusal.
Medicaid Asset Protection Trusts
A Medicaid asset protection trust (MAPT) is a type of irrevocable (irreversible) trust that protects assets from being counted towards Medicaid’s asset limit. These trusts also preserve assets for family and other loved ones as inheritance. Assets, which may include one’s home, are put into a trust and are no longer considered owned by the person who created the trust (the Medicaid applicant). While there is no limit as to the value of the assets that can be placed in this type of trust, a major shortcoming is that MAPTs are a violation of Medicaid’s look-back period. Violating the “look back” results in a penalty period of Medicaid ineligibility, and therefore, these trusts should only be utilized well in advance of the need for long-term care Medicaid. To be very clear, if it is thought that Medicaid will be needed in the near future, this strategy is not suggested. More on MAPTs.
“Half a Loaf” Strategies
These strategies are gifting strategies intended to lower a Medicaid applicant’s assets, while preserving assets for loved ones as an inheritance. “Half a Loaf” strategies violate Medicaid’s look back period, resulting in Medicaid disqualification for a specific period of time. However, with advanced planning and correctly utilizing this strategy, the Medicaid applicant has the funds to pay for long-term care until the period of ineligibility is over. The most relevant “half a loaf” strategy is the modern half a loaf. (The original half a loaf is no longer used, and the reverse half a loaf is only utilized in a handful of states.) Overly simplified, with a modern half a loaf, a Medicaid applicant gives approximately half of their assets to family and purchases a Medicaid compliant annuity with the remaining assets. The annuity creates an income stream, which is used to pay for long-term care during the Medicaid ineligibility period. This strategy is very complicated and professional assistance is highly recommended.
Home Protection Strategies
While some of the asset planning strategies mentioned above can also protect one’s home from estate recovery, the following strategies are specific to protecting one’s home.
Lady Bird Deeds
Lady bird deeds allow Medicaid applicants to protect their home for their adult children or other loved ones as inheritance. With this type of life estate deed, the Medicaid recipient still has ownership over their home as long as they are living. However, upon their death, the home is automatically transferred to the named beneficiary. The home is no longer owned by the deceased Medicaid recipient, and is therefore, not considered a part of their estate. This protects it from Medicaid’s estate recovery program, in which states attempt to collect reimbursement of funds paid for long-term care. This planning strategy, which is very inexpensive, cannot be utilized in all states. More on lady bird deeds.
Child Caregiver Exception
The child caregiver exception allows Medicaid applicants to transfer their home to their healthy adult child. The child must have lived with their aging parent for a minimum of 2 years prior to the parent’s nursing home admittance. The child must have provided a level of care that prevented the parent from requiring nursing home care during this time. Also called the child caretaker exemption, this technique can be utilized in all states to protect one’s home for an adult child as inheritance. Specific rules vary based on the state of residence, and if not done correctly, transferring one’s home can violate Medicaid’s look back rule, resulting in a penalty period of Medicaid ineligibility.
The sibling exception permits Medicaid applicants to transfer their home to a sibling who also has equity interest in their home. This means the siblings share ownership of the home. The sibling must have lived in the home for a minimum of one year immediately preceding the institutionalization (i.e., nursing home placement) of the sibling applying for Medicaid. Transferring the home protects it from the Medicaid estate recovery program and instead preserves it for one’s sibling. Prior to transferring the home to a sibling, it is crucial that all criteria for the sibling exemption be met in the state in which one resides. If transferred without all the criteria met, the transfer will be a violation of Medicaid’s look back rule and will cause a period of Medicaid disqualification. More about the sibling exception.
Income Planning Strategies
Spousal Income Transfers
A similar technique to the one mentioned above for asset planning can be applied to a married couple’s income. Also a spousal protection rule, the non-applicant spouse or “well spouse” of a nursing home Medicaid applicant or HCBS Waiver applicant is entitled to a sufficient amount of monthly income to continue living at home. This is called the Minimum Monthly Maintenance Needs Allowance, or MMMNA, and allows applicant spouses to transfer their income to their non-applicant spouses. In 2022, the applicant spouse may transfer up to a maximum of $3,435 / month in income to the non-applicant spouse. There are exceptions, such as Illinois, that only allows a maximum of $2,739 / month. This transfer of income also effectively lowers the applicant’s monthly income. Learn more about how Medicaid counts income here. This technique, which is commonly utilized and encouraged by Medicaid, is fairly straightforward and should require little to no outside assistance. During the application process, the Medicaid agency assists in determining the amount of the spousal income allowance.
Qualified Income Trusts / Miller Trusts
For individuals who are not married or whose non-applicant spouse’s income exceeds the MMMNA, Qualified Income Trusts (QIT) offer another, slightly more complicated technique for helping the applicant to meet the Medicaid income limit. Income over the limit is allocated into a qualified irrevocable (unchangeable and uncancelable) income or Miller Trust, and is generally used to pay one’s medical bills and care. Often, the remaining money becomes the property of the state after the Medicaid applicant passes. However, typically these accounts are set up for just a few hundred dollars to be directly deposited each month, which in turn, allows the applicant to qualify for Medicaid and receive many thousands of dollars in care and support each month. QIT / Miller Trusts are not allowed in all states. Read more on Miller Trusts / QITs.
Income Spend Down
Some states allow Medicaid applicants who are over the income limit to spend their “excess” income (the income over the established limit) on medical expenses. This strategy, an income spenddown program, is often referred to as the medically needy pathway. Persons become eligible for Medicaid once they have spent their income down to the medically needy income limit. This strategy is not complicated, and although not available in all states, is encouraged in the ones that allow it. Learn more about this pathway to Medicaid eligibility.