Medicaid Spend Down Strategies

Medicaid is not just for the indigent.  Medicaid is a government program which offers a variety of benefits to those in need, which includes elderly individuals who need assistance with paying for long term care costs. With the right planning, assets can be protected for the next generation, while helping a person become eligible for help with long term care costs.

Medicaid was to help with insurance coverage and protect seniors from the costs of medical care, regardless of their income, health status or past medical history, reports Kiplinger in a recent article “How to Restructure Your Assets to Qualify for Medicaid.” Medicaid was a state-managed, means-based program, with broad federal parameters that is run by the individual states. Eligibility criteria, coverage groups, services covered, administration and operating procedures are all managed by each state.

With the increasing cost and need for long term care, Medicaid has become a life-saver for people who need long term nursing home care costs and home health care costs not covered by Medicare.  So, this article will discuss various techniques and ideas on how to become eligible for Medicaid when appropriate.  However, this article is for ideas only, and I cannot stress this enough, but you should never undertake a Medicaid spend down without the advice and direction of an attorney.

If the household income exceeds your state’s Medicaid eligibility threshold, two commonly used trusts may be used to divert excess income to maintain program eligibility and thereby spend down income.

QITs, or Qualified Income Trusts. Also known as a “Miller Trust,” income is deposited into this irrevocable trust, which is controlled by a trustee. Restrictions on what the income in the trust may be used for are strict, and include things such as medical care costs and the cost of private health insurance premiums. However, the funds are owned by the trust, not the individual, so they do not count against Medicaid eligibility.  This tool is extremely effective, which facilities eligibility despite the amount of income.

If you qualify as disabled, you may be able to use a Pooled Income Trust. This is another irrevocable trust where your “surplus income” is deposited. Income is pooled together with the income of others. The trust is managed by a non-profit charitable organization, which acts as a trustee and makes monthly disbursements to pay expenses for the individuals participating in the trust. When you die, any remaining funds in the trust are used to help other disabled persons.

Meeting eligibility requirements are complicated and vary from state to state. An estate planning attorney in your state of residence will help guide you through the process, using his or her extensive knowledge of your state’s laws. Mistakes can be costly, and permanent, and often appear in Medicaid spend down.

For instance, your home’s value (up to a maximum amount) is exempt, as long as you still live there or intend to return. Several other exemptions may apply depending on the assets.  Otherwise, the amount of countable assets for an individual is $2,000, more for a married couple.

Transferring assets to other people, typically family members, is a risky strategy. There is a five-year look back period and if you’ve transferred asset without getting adequate value in return during that period your eligibility could be affected. So, gifting strategies could be risky.  If the person you transfer assets to has any personal financial issues, like creditors or divorce, they could lose your property.

Asset Protection Trusts, also known as Medicaid Trusts. You may transfer most or all of your assets into this trust, especially if they are otherwise countable. Upon your death, assets are transferred to beneficiaries, according to the trust documents.  This needs to be done in advance of the 5 year look-back, which is why this works best in anticipation of long term care need in the future, not when its imminent.

Right of Spousal Transfers and Refusals. Assets transferred between spouses are not subject to the five-year look back period or any penalties. Some states allow Spousal Refusal, where one spouse can legally refuse to provide support for a spouse, making them immediately eligible for Medicaid. The only hitch? Medicaid has the right to request the healthy spouse to contribute to a spouse who is receiving care but does not always take legal action to recover payment.

I should also point out that Medicaid recovery is an important aspect of Medicaid planning.  You can see this link for more details on that topic.  https://www.galliganmanning.com/protect-assets-from-medicaid-recovery/

Talk with your estate planning attorney if you believe you or your spouse may require long-term care and before undertaking Medicaid spend down. Consider the requirements and rules of your state. Keep in mind that Medicaid gives you little or no choice about where you receive care. Planning in advance is the best means of protecting yourself and your spouse from the excessive costs of long term care.

Reference: Kiplinger (Nov. 7, 2021) “How to Restructure Your Assets to Qualify for Medicaid”

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How Do Special Needs Trusts Work?

Special needs trusts (SNT) are critical tools for protecting a beneficiary with disabilities’ benefits while providing for their needs.

Special needs trusts (or supplemental needs trusts) have been used for many years. However, there are two factors that are changing and clients need to be aware of them, says the article “Special-Needs Trusts: How They Work and What Has Changed” from The Wall Street Journal. For one thing, many people with disabilities and chronic illnesses are leading much longer lives because of medical advances. As a result, they are often outliving their  primary caregivers. This makes planning for the long term more critical, and the use of special needs trusts more critical.

Second, there have been significant changes in tax laws, specifically laws concerning inherited retirement accounts.

Special needs planning has never been easy because of the many unknowns. How much care will be needed? How much will it cost? How long will the person with disabilities need them? Tax rules are complex and coordinating special needs planning with estate planning can be a challenge. A 2018 study from the University of Illinois found that less than 50% of parents of children with disabilities had planned for their children’s future. Parents who had not done any planning told researchers they were just overwhelmed.

Here are some of the basics:

A special needs trust, or SNT, is created to protect the assets of a person with a disability, including mental or physical conditions. The trust may be used to pay for various goods and services, including medical equipment, education, home furnishings, etc.

A trustee is appointed to manage all and any spending. The beneficiary has no control over assets inside the trust. The assets are not owned by the beneficiary, so the beneficiary should continue to be eligible for government programs that limit assets, including Supplemental Security Income or Medicaid.

There are different types of Special Needs Trusts: pooled, first party and third party. They are not simple entities to create, so it’s important to work with an experienced estate elder law attorney who is familiar with these trusts.

To fund the trust after parents have passed, they could name the Special Needs Trust as the beneficiary of their IRA, so withdrawals from the account would be paid to the trust to benefit their child. There will be required minimum distributions (RMDs), because the IRA would become an Inherited IRA and the trust would need to take distributions.

The SECURE Act from 2019 ended the ability to stretch out RMDs for inherited traditional IRAs from lifetime to ten years. However, the SECURE Act created exceptions: individuals who are disabled or chronically ill are still permitted to take distributions over their lifetimes. This has to be done correctly, or it won’t work. However, done correctly, it could provide income over the special needs individual’s lifetime.

The strategy assumes that the SNT beneficiary is disabled or chronically ill, according to the terms of the tax code. The terms are defined very strictly and may not be the same as the requirements for SSI or Medicaid.

The traditional IRA may or may not be the best way to fund an SNT. It may create larger distributions than are permitted by the SNT or create large tax bills. Roth IRAs or life insurance may be the better options.

The goal is to exchange assets, like traditional IRAs, for more tax-efficient assets to reach post-death planning solutions for the special needs individual, long after their parents and caregivers have passed.

Reference: The Wall Street Journal (June 3, 2021) “Special-Needs Trusts: How They Work and What Has Changed”

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