TEN TOP MEDICAID PLANNING STRATEGIES
by: Begley Admin
by Thomas D. Begley, Jr., Esquire, CELA
Medicaid Planning strategies basically fall into two categories: spend down and transfer of assets. The ten top strategies include the following:
- There are several options with respect to the home. The home could be transferred to the community spouse without a transfer of asset penalty. However, if the community spouse suffers from a diagnosis or is aging, then this might not be the best option. The home could be transferred to children subject to the transfer of asset penalty, but there are risk factors such as lawsuits by children’s creditors, divorce, death of a child, etc. The child will also be saddled with carryover basis on the value of the home. Often, transferring the home to an irrevocable trust and retaining a right to use and occupy for the individual makes the most sense. The individual would pay all of the expenses of maintaining the home including taxes, insurance, utilities, etc. The individual would remain entitled to the homestead tax rebate, senior citizen’s deduction, Veteran’s deduction, Veteran’s exemption, and real estate tax freeze. The transfer would be subject to the Medicaid transfer of asset penalty. However, the primary residence exclusion on the sale of a home could be retained as well as the step-up in basis, if the home is not sold during the individual’s lifetime.
The home could be transferred without a Medicaid transfer of asset penalty to: a child under age 21, a child who is blind or disabled, a sibling who has lived in the home for at least one year prior to the date of institutionalization and has an equitable interest in the home, or to a caregiver child discussed above. The Medicaid applicant could sell a remainder interest in the home. The purchase price for the remainder interest would be the Medicaid value of the home minus the value of the life estate. At age 75, a life estate is worth approximately 52%. Therefore, a remainder interest in a $400,000 house could be sold to a child for approximately $192,000. The problem is if the home is sold during the parent’s lifetime, the parent would be entitled to that portion of the proceeds of sale represented by the value of the life estate.
- Debt Repayment. The Medicaid applicant could repay all debts including outstanding mortgages on real estate, home equity loans, car loans, credit card bills, and student loans.
- Home Improvements. Prior to the application for Medicaid, the community spouse may want to spend money on home improvements that will have to be made anyway over the next few years.
- New Car. The community spouse may want to purchase a new car.
- Prepaid Funeral. A prepaid funeral should be purchased for the Medicaid applicant and the community spouse, and burial plots could be considered for other family members.
- The community spouse may wish to purchase a Medicaid-compliant annuity. This would convert countable assets used to purchase the annuity to a non-countable income stream for the community spouse.
- Transfer Assets to a Blind or Disabled Child. There is no Medicaid transfer of asset penalty for gifts to a blind or disabled child, but care must be taken not to disqualify that child from public benefits they may be receiving and a determination must be made as to whether the child has liens against him. The child must be responsible. When necessary, assets should be transferred to a blind or disabled child using a special type of trust designed to protect the child’s own benefits.
- Care Agreement. If a child is caring for a parent, a written care agreement can be drafted and the parent can hire the child to provide care. The agreement should be very detailed outlining the scope of care, the hours of care being provided, and should provide for reasonable compensation. Fifteen dollars an hour is probably about the limit that would escape a Medicaid challenge. The Care Agreement must be fully executed and in place prior to any money changing hands in payment of caregiving services.
- Large Transfer of Assets. A large transfer of assets could be made, including the transfer of the home to a trust with the expectation that the Medicaid applicant or the transferee would pay for whatever care is necessary for five years.
- Transfer Assets and Pay a Penalty. If assets are transferred during the five-year period, there will be a Medicaid transfer of asset penalty. The penalty is calculated by dividing the amount transferred by the divisor, which currently is $361.20 per day or $10,836 per year. So if $108,360 were transferred, the Medicaid applicant would be ineligible for Medicaid for ten months. If the applicant were receiving care at home at a cost of $3,000 per month, half of the funds transferred to the transferee would have to pay for the care. If the care costs $3,000 per month, the transferee would essentially be giving back $30,000, but would retain the remaining $78,360. In order for this strategy to work, the Medicaid applicant must be clinically and financially eligible, so all assets must be transferred and a Medicaid application must be filed.