Strategies for Protecting Assets from Medicaid
I've attained the age when I think more and more about running out of assets because of the drain of a long-term illness or the possibility of a protracted period facing nursing care costs. I've always told clients that long-term care insurance policies are a bit of a gamble, first because they can be very expensive, and second because they don't really come close to covering the cost of full nursing care for an extended period. The gambling part comes in because actual usage of the insurance coverage is rather low - historically under 20%. On the other hand, actual usage of homeowners or auto coverage is also quite low. When compared to the actual usage of health insurance, or even life insurance, which is quite high - 100% for life insurance, long-term care insurance policies don't look like a good investment. To add to their bad image, they have been so aggressively sold in the past that the state of Minnesota actually had to step in and severely restrict their marketing. Things have changed since 2006 (Deficit Recovery Act of 2005 commonly called DRA 2005 or just DRA) however. Now, an individual is able to protect certain assets in his or her estate from the requirement to reimburse Medicaid for nursing care expenses up to the insurance policy coverage limit. For example, if a person purchases a policy that qualifies under the new rules, with a lifetime limit of coverage of let's say $300,000 - that is how much will be protected from Medicaid recovery in the estate after the person dies. In addition, insurance companies have now introduced life insurance and annuity policies that have long-term care riders which kick in when care is needed, but which still provide death or income benefit. Now what if the individual wants to protect assets in the estate for family or other beneficiaries and won't qualify for insurance for age or health reasons, or simply doesn't want to purchase the coverage? Before DRA, Medicaid had what was called a three-year "look-back" to see if someone transferred assets to somebody else to avoid paying for their cost of care. DRA extended the time for the look-back to five years and any effort to transfer large sums of money or substantial property to someone else or to a trust and even if the five-year period is surpassed, it could be construed to be a fraudulent transfer. The penalties for Medicaid fraud are severe. So the old tactic of transferring assets to kids or a trust now is fraught with danger. Even creating life estates with a personal residence, which usually left the home to a family member after death with minimal or no consequences now can result in the home being "pulled back" into the estate for purposes of Medicaid payment. There is still one viable planning option that appears to pass muster under the new law - the income-only trust. Here's an example of how it might work: Mom and Dad are sure they want to leave some of their estate to their children or grandchildren. They have financial assets worth about $500,000 and they are willing to transfer $200,000 of this to the new trust. Their attorney drafts a trust which pays the income from the assets (and only the income) to Mom and Dad while they are both healthy, and then if one of them needs long-term care, only to the healthy one for life. After the second death, the trust terminates and the remainder is passed on to the children. There are some disadvantages to this type of planning. Gifts (including gifts to an Income Only Trust) can cause the donors to be ineligible for Medicaid benefits for a limited period of time. The length of the ineligibility period depends upon the value of the assets given away. After the ineligibility period has expired, the assets in the Medicaid Asset Protection Trust should be protected from nursing home costs. The other drawback to this kind of trust is that neither spouse can have access to the principal (or assets) of the trust. It is precisely this lack of access that protects the trust assets from nursing home costs. The Trustee can, however, be permitted under some circumstances to distribute trust assets to the couple's children.