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Understanding Medicaid Asset Protection Planning Opportunities

James C. Mulder
attorney at law

This article addresses a related and often misunderstood topic, Medicaid planning.

What is Medicaid?

Medicaid is a federal government program that provides financial assistance to persons age 65 and over, or those under 65 who are disabled and who are in need of substantial medical assistance. Medicaid is a needs-based program a person must have a medical need for the assistance and must be of limited financial means before he or she may qualify.

Medicaid is very different from Medicare. Medicare is health insurance available to all persons over age 65 who qualify for Social Security, as well as those who are under 65 and who the Social Security Administration determines to be disabled. Medicare will not pay for nursing home, assisted living or home health care on a long-term basis. Medicare will only pay for this type of care for up to 100 days, and only for the purpose of providing rehabilitation following a three-day or longer hospital stay.

Unfortunately, with the rising costs of long-term care, many people cannot afford to pay privately for home health care, assisted living, or nursing home care. According to the 2006 Study of the MetLife Mature Market Institute, the national average cost for a private room in a nursing home is over $75,000 annually. The national average cost of in-home care is between $17 and $19 per hour. As noted in a recent Harvard University Study, 69% of single people and 34% of married couples would exhaust their assets after 13 weeks in a nursing home. For those whose assets won't last 13 weeks much less the rest of their lives Medicaid planning becomes an important consideration. Planning Tip: Most people do not have sufficient assets to pay privately for long-term care. Medicaid planning is most appropriate for these individuals, a growing segment of the population.

What is Medicaid Planning?

The term Medicaid planning involves either spending down or otherwise protecting a person's assets so that he or she has minimal assets and can meet the financial criteria for Medicaid qualification (which can be as low as $2,000 for a single person). Although based on federal law, Medicaid rules are different from state to state and therefore it is important to consult with a legal expert in the field of Medicaid. Furthermore, the transfer of assets, purchase of financial products, or otherwise disposing of assets has tax implications for the transferor as well as the recipient, necessitating the advice of a tax advisor. Finally, a financial advisor is a necessity to help clients choose the correct financial products as part of an overall Medicaid planning strategy. In Texas the State Bar of Texas takes the position that only attorneys can do Medicaid Planning.

Planning Tip: Medicaid planning requires input and a coordinated effort from the client's legal, financial and tax advisors, all of whom should be knowledgeable in Medicaid planning. We have staff at Mulder & Freedman, PC who are very knowledgeable in this type of planning, with over 15 years of experience.

Medicaid Pre-Planning

Medicaid planning can be divided into two types: pre-planning and crisis planning. Pre-planning is for those individuals who have not yet begun to spend their assets on private care, but may need to in the coming years. Crisis planning is for those individuals using their life savings for long-term care (either at home or in a facility) with a substantial risk that they will run out of money.

In pre-planning cases, life insurance can provide tremendous planning benefits when implemented correctly. The purchase of a single premium life insurance policy by an irrevocable trust, or subsequent transfer to such a trust, will not only replace a couple's net worth, it will protect the cash value of that policy from Medicaid. Alternatively, if not owned by an irrevocable trust, the cash value of any life insurance policy will count against the amount of assets a person can keep and still qualify for Medicaid.

For example, assume Mr. and Mrs. Jones, both age 65 and in good health, have $450,000 of assets. At their age, a single premium of $100,000 would buy a second-to-die death benefit of nearly $450,000. If an irrevocable trust owns the policy and neither Mr. or Mrs. Jones have access to the trust assets, after a certain period (most likely 5 years), their entire net worth would be protected from Medicaid, and Mr. and Mrs. Jones would still have $350,000 left to live on. Mr. and Mrs. Jones could transfer more assets to the irrevocable trust, if they desire. In fact, if the couple also purchased a five-year long-term care policy (or a life insurance policy with a long-term care rider), they could protect all of their assets from Medicaid, even with a 5-year look-back period.

Planning Tip: With pre-planning clients, life insurance owned by an irrevocable trust or limited liability company, perhaps combined with longterm care insurance or a long-term care rider can provide significant Medicaid planning benefits. For those who choose to plan early, the use of an irrevocable trust combined with life insurance and/or long-term care insurance can provide optimum asset protection for an aging client. When gifting is used as a planning strategy, the person receiving the gift often needs advice on how to invest the money they receive. Thus, Medicaid planning also opens the door for the financial advisor to converse with younger family members about the need for proper planning, including the need for disability insurance and long-term care insurance.

For more information on the basics of asset protection for your business or family, contact WealthKeepers today at 713.461.9699 or info@WealthKeepers.net