TEN COMMON MISTAKES IN MEDICAID PLANNING AND ESTATE RECOVERY
by: Begley Law Group
by Thomas D. Begley, Jr., Esquire, CELA
Ten Common Mistakes in Medicaid Planning
- The single biggest mistake is waiting to plan. As a general rule, the sooner Medicaid planning begins the better the result. If significant assets are transferred, there is a five-year lookback, and the five-year lookback does not begin until the assets are actually transferred. Start now.
- Failing to Transfer the Home. If the Medicaid applicant is married and the community spouse is residing in the home, their home is not considered to be a countable asset for Medicaid eligibility purposes. However, if the house is still titled in both spouses’ names when the institutionalized spouse dies, Medicaid will place a lien on the home. When the community spouse sells the house or dies, Medicaid will insist on repayment. Transferring title prevents this.
- Failing to Disclose all Assets or all Transfers to Medicaid. Failure to disclose assets or transfers to Medicaid constitutes Medicaid fraud, which is a criminal offense. It can also cause a loss of eligibility and Medicaid may demand repayment for past medical assistance.
- Failing to Change the Will of the Community Spouse. Spouses usually have wills leaving their estates to the other. However, if a community spouse has a will leaving assets to the institutionalized spouse, the institutionalized spouse will be disqualified from Medicaid until all of the inheritance is spent down. In New Jersey there is an elective share statute, so the community spouse should leave the institutionalized spouse the minimum amount to satisfy the elective share but the remainder should be left to children or other family members or friends.
- Failing to Transfer Aggressively. Occasionally individuals transfer assets to children but retain too much in their own names. If this happens, there will be excess resources at the time the individual would otherwise be eligible to apply for Medicaid, and those excess resources will have to be spent down, further delaying Medicaid eligibility. It is always better to over-transfer to reliable children, family or friends, because those individuals can retransfer to the extent necessary to pay for care.
- Failing to Administer Trusts Properly. Frequently individuals place assets in irrevocable trusts and then take them back out in whole or in part, or they use trust funds to directly pay long-term care expenses. Medicaid correctly considers these trusts to be a sham.
- Timing of Snapshot. In New Jersey the community spouse is allowed to keep one-half of the countable assets with a maximum of $130,380 in 2021. If assets are spent down below $260,760 prior to the snapshot, which is the date of the Medicaid application or the date of institutionalization, whichever first occurs, then half will be less than $130,380.
- Failing to Take Advantage of Exempt Transfers. Exempt transfers are discussed above.
- $15,000 Transfers. Individuals think they can transfer $15,000 per year to each child without a transfer of asset penalty. They are confusing what used to be the annual exclusion for gifts under the Federal Gift Tax law with Medicaid transfer of asset rules. New Jersey does not have a de minibus exemption for transfers from the transfer of assets penalty, so technically even modest birthday and holiday gifts are subject to the penalty. Most caseworkers will overlook those modest gifts, but some will not.
- Failing to Take Assets out of an Income Only Trust. An individual can transfer assets to an irrevocable trust reserving income to himself. The transfer of asset penalty begins when the assets are transferred to the trust. However, New Jersey has a broad definition of estate recovery, so assets in the Income Only Trust would be included for estate recovery purposes. The solution is to transfer the assets out of the Income Only Trust prior to applying for Medicaid. This will result in a transfer of asset penalty calculated by applying the average income over the past five years by the life expectancy of the Medicaid applicant. It is better to pay the penalty than to lose the assets to estate recovery.
New Jersey recovers from the estates of deceased Medicaid recipients. New Jersey has a broad definition of estate for this purpose. No recovery is made until after the death of the Medicaid recipient’s surviving spouse, and then only if there are no surviving children under the age of 21 or that are blind or permanently disabled. Federal law requires estate recovery only from a probate estate, but New Jersey has expanded that definition to include all assets, real and personal, including assets conveyed to a survivor through joint tenancy, tenancy in common, survivorship, or a living trust. A third party trust established for the benefit of the deceased Medicaid recipient is not subject to estate recovery. However, under the concept of tracing, if a trust is established by a third party with assets owned by the Medicaid applicant within five years prior to the beneficiary’s death, then those assets are subject to estate recovery. Again, there are hardship provisions, but hardship is extremely difficult to prove. While the statute excludes a life estate, an Income Only Trust would be included in estate recovery. Estate recovery applies only to Medicaid payments made for services received after the individual attains age 55. No recovery is made if the estate is under $500.