I have had more than a couple of clients come to me after their friends or financial advisors told them to put all of their wealth into a trust so that it would be protected from Medicaid/Medicare when they die. That’s it. That’s all they have been told and it sounds simple enough. However, these people have, by and large, been healthy people in their 50s or 60s, so when I tell them exactly how that works, very few of them really want to create the kind of trust that accomplishes protection from Medicaid liens.
First of all, there is a big difference between Medicare and Medicaid. Medicare is health insurance provided to the public beginning at age 65 regardless of your income, your asset level, or your employment. When you get on Medicare, you will probably want to also purchase a Medicare Supplement which will pay the portion of your medical bills that Medicare does not pay (usually Medicare pays 80% and you pay 20%). Generally, there are no liens that Medicare assesses at your death. You may, indeed, have unpaid medical bills that will be debts at your death (your 20% if you don’t have a Medicare Supplement policy), but, generally, Medicare doesn’t attempt to get back from your estate any sums that it paid on your behalf.
Medicaid, on the other hand, is health insurance for people below certain income and asset levels. If you have worked all of your life at a job that pays decently, you probably won’t have had to apply for Medicaid. If you collect SSI (Supplemental Social Security Income) because you are disabled and you didn’t work long enough to collect SSD (Social Security Disability), you automatically get Medicaid to pay your health care bills. However, due to the fact that Medicaid is an asset qualifying program, if you die with assets, Medicaid is going to assert liens on your estate and property for monies it has expended on you during your lifetime.
So how is this relevant to ordinary folks like my clients.
In-home, assisted living, and skilled nursing care (in a nursing home) are very expensive. The average annual cost of a semi-private room in a nursing home in Florida is over $87,000. The average annual cost of assisted living is over $37,000. That cost, of course, can wipe out a lifetime of hard-earned savings pretty quickly.
Medicare does not pay for these kinds of care. Medicare will pay the first 100 days only of a stay in a nursing facility and will only pay for a limited amount of in-home care. The Medicare Supplements do not extend to pay these costs either.
Therefore, for long-term care, there are only 3 options available for people: 1) private pay; 2) long-term care insurance; or 3) Medicaid or VA benefits. Again, private pay is you paying for your own care at the very high rates just discussed. Long-term care insurance is special, specific insurance that you can pay for, but it is costly unless you lock in the rates when you are young.
That leaves Medicaid (or if you are a veteran or spouse of a veteran, VA benefits). However, Medicaid is only available to persons without assets over a certain level.
Revocable and Irrevocable Trusts
The only way to become eligible for Medicaid is to spend down your money. If you simply gift it away, Medicaid will deem you to be ineligible for benefits for a period of time determined by the amount you gave away. Medicaid is able to examine your bank and other financial records for 5 years to determine whether you have made any transfers that they consider to be gifts (not for value received). This is called the “look-back period.”
There are exemptions from assets which are not counted as assets by Medicaid, such as a homestead up to a value of $552,000 and one vehicle of any value (even a Rolls Royce). A lot of assets can go into these types of assets and not be counted by Medicaid; however, any assets left over have to be taken out of the name of the person trying to qualify for Medicaid.
Putting money into a Revocable Trust does not do anything as far as Medicaid is concerned. That is because a Revocable Trust is considered a Grantor Trust. Because it is revocable, it is still money available to you. To make these assets unavailable to you, you would have to put your assets into an Irrevocable Trust with a Trustee that is not you. An Irrevocable Asset Protection Trust is one that is set up with someone other than you as Trustee, but you as beneficiary. But you don’t get to call the shots as to how the money is invested or even how it is paid to you. This type of trust starts the five-year clock, so you would still have to wait for 5 years after setting up the trust before you would be eligible to apply for Medicaid. The benefit of this trust is that after you die, your heirs can inherit the remaining assets in the Trust. You could also put money into a Special Needs Trust. This type of Irrevocable Trust is an exempt transfer so the five years doesn’t apply, but because you set it up, the first beneficiary of the Trust is Medicaid to the extent of any lien Medicaid can assert for money paid by it for your care. Monies from this Trust can be used to pay for your care over and above what Medicaid pays for.
That is why most of the clients who came to me thinking they wanted to set up a trust to protect against Medicaid liens decided they didn’t really want to do that kind of thing yet.
When to Set Up an Irrevocable Trust for Applying for Medicaid
First of all, if you have substantial assets (liquid assets of over $500,000 or more), you may not want to ever apply for Medicaid. Not all skilled nursing facilities accept Medicaid and if you want a certain high level of care and luxurious surroundings, Medicaid is probably not the way to go. You could, under these circumstances, decide how long you want to pay for your own care in the luxury facility, set that money aside, and then put the rest in a trust, either an asset protection trust or a Special Needs Trust. Again, however, you need to be in a position where you don’t mind losing control over your assets.
Second, if you have been diagnosed with a condition that raises the chances that you will end up in long-term care eventually (Alzheimer’s, dementia, multiple sclerosis, Parkinson’s, etc.), you will want to consult with an Elder Law attorney to see what options are available and to make a plan for your future care.
The Bottom Line
For most healthy individuals, losing control of their assets is not something they really want to do without some indication that they will actually need long-term care. The latest statistics from the Family Caregiver Alliance indicates that 35% of persons over 65 years of age will eventually enter a nursing home. Accordingly, you may not need long-term care and if you don’t, do you really want to lose control over your assets? The bottom line is this – set up an appointment with an Elder Law/Estate Planning attorney. Go over your health and your financial status, as well as your estate planning goals. When and if you suspect you may end up needing long-term care in the future, go back to the attorney and have another in-depth review. But as common sense would dictate, it isn’t as simple as placing your money into a trust and then magically having the government pay for your long-term care. If it was that simple, I suspect Medicare would be paying for long-term care for everyone.