As the average life expectancy in America continues to increase, we can all anticipate living much longer than even our grandparents did. Living longer, however, also increases the odds that long-term care (LTC) will be needed at some point in your life. The cost of that care could threaten your retirement nest egg, as well as the family assets you hoped to pass down to future generations. Medicaid can help with your LTC expenses. However, if you did not plan ahead, you may need to significantly deplete your assets before you can qualify for Medicaid. The good news is a special trust can help you qualify for Medicaid without jeopardizing your financial future.
Medicaid Eligibility and the Spend-Down Rules
At an average cost of over $80,000 a year nationwide, the average person cannot afford to spend much time in long-term care (LTC) without putting a serious dent in their financial position. Consequently, over half of all seniors in LTC turn to Medicaid for help. Medicaid can help cover LTC expenses. However, since Medicaid is a “needs-based” federal program, an applicant must first demonstrate a need for benefits to qualify for assistance. Both your income and your “countable resources” will be considered when you apply for Medicaid. Countable resources include bank accounts, brokerage accounts, and all other assets that are not exempt. On the other hand, some assets can be exempted, such as your primary residence (up to an equity limit).
If your countable resources exceed the paltry limit ($2,000 total for an individual applicant), Medicaid will deny your application. In order to meet the Medicaid eligibility guidelines, then you would need to engage in what is referred to as Medicaid “spend-down.” In practical terms, this means you would need to reduce your countable resources until the value of those resources is below the Medicaid limit. Only after your assets had dwindled down to below the resources limit would Medicaid consider approving your application.
Can an Irrevocable Income Only Trust Help?
Fortunately, there is a way to protect the family wealth and still qualify for Medicaid through the creation of an Irrevocable Income Only Trust. Keep in mind the goal is to reduce the value of your “countable resources” so you, or your spouse, can qualify for Medicaid. An Irrevocable Income Only Trust accomplishes that goal by transferring your “excess” assets into the trust and providing you with income only from the trust. Because the trust is an Irrevocable Trust, assets you transfer into the trust are no longer legally considered to be yours. As such, they will not be counted when determining the value of your “countable resources.” Eventually, the trust assets will pass to heirs after the death of the surviving spouse.
In the meantime, you would receive income from the trust. When in LTC expenses in excess of your allowable income would be covered by Medicaid. If your trust income is excessive, your estate planning attorney may be able to utilize additional Medicaid planning tools to reduce the amount of countable income you have when you apply for Medicaid benefits.
Don’t Forget About the Five-Year “Look-Back” Period
Knowing that an Irrevocable Income Only Trust can protect and preserve your wealth for future generations should be great news; however, don’t forget about the Medicaid five-year “look-back” rule as it is essentially the last piece of the Medicaid planning puzzle.
The five-year look-back rule prevents you from transferring assets at the last minute in anticipation of the need to qualify for Medicaid benefits. When you apply, Medicaid will review your finances for the five-year period, preceding your application, looking for asset transfers made for less than fair market value. If any are found, Medicaid will impose a penalty period during which time you will not be eligible for benefits. The length of the penalty period is determined by taking the fair market value (at the time of transfer) of the transferred asset(s) and dividing that figure by the average monthly cost of private pay LTC in your area. The penalty period only begins running when you are otherwise eligible. In other words, you must have the medical and financial need.
Because of the five-year look-back rule, creating an Irrevocable Income Only Trust at the last minute won’t work. Instead, you need to include Medicaid planning tools and strategies in your estate plan long before the need to qualify for benefits actually arises. If you or someone in your family are concerned about the costs of LTC and want to know if this might make sense, give us a call. One of our attorneys would by happy to sit down and help you figure out if this type of planning is appropriate for you or your family member.
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Written By: The American Academy of Estate Planning Attorneys