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Understanding Medicaid Asset Protection Planning Opportunities

James C. Mulder
attorney at law

Medicaid Crisis Planning

Even with crisis planning there are significant planning opportunities for our clients. While transfers either outright to a family member or to an irrevocable trust create a penalty period for the person making the gift, sometimes a planned strategy involving gifting and the use of an annuity can provide a valuable crisis planning tool. For example, assume Mr. Jones suffers a stroke and ends up in a nursing home, and his cost of care exceeds the couple's monthly income by $4,500 per month. Since the couple has assets of $450,000, they are $336,360 over the allowable limit of $113,640 for a married couple. One under-utilized but very effective strategy is for the couple to purchase a Medicaid Qualifying Annuity (MQA) in favor of the healthy community spouse, Mrs. Jones. By converting the excess assets into an income stream, Mr. Jones can now qualify for Medicaid and the MQA provides Mrs. Jones with extra income to supplement the loss of her husband's income (which must be paid to the facility).

For a single person in crisis planning, a plan of partial gifting plus the purchase of a single premium immediate annuity may be appropriate. Keep in mind that any time a Medicaid applicant makes a gift, whether it is to another person or to a trust, Medicaid will impose a penalty based on the size of the gift. The penalty is the equivalent of a waiting period - the larger the gift, the longer a Medicaid applicant must wait to obtain eligibility. Because of the severe penalties for gifting, clients should not undertake this type of strategy without the legal advice of a Medicaid planning attorney.

Identifying Possible Medicaid Planning Needs

In determining which clients are appropriate for Medicaid planning, it is important to consider the client's age and life expectancy, monthly income, monthly medical expenses and other assets. Take Anna, a 72 year-old woman residing in an assisted living facility costing $3,500 per month. She has other medical expenses, including prescriptions, of $300 per month. Her only income is from social security, which amounts to $1,200 per month. Anna is depleting her savings at a rate of $2,600 per month, just for medical expenses. Anna has $450,000 in a brokerage account, which on its face sounds like a lot of money, given she is only spending approximately $36,000 per year on her care. But when we take into consideration the fact that Anna may very well need more care in the future, which could cost as much as $10,000 per month, and given her life expectancy of 13.96 years, it is clear that Anna's assets may not be sufficient to cover her long-term care expenses for the rest of her life. Anna is not only an appropriate client for Medicaid planning, she is a crisis-planning client.

Planning Tip: It is important to take a client's age, medical needs, monthly expenses and income into consideration to determine whether Medicaid planning is necessary or appropriate.

Importance of Proper Legal Documents

Many clients come to us when the person needing the Medicaid planning is mentally incapacitated. When that is the case, the planning can only be accomplished with a “durable” power of attorney and the power of attorney needs to have specific authorization to allow for any Medicaid planning implementation, particularly the power to make gifts that is unrestricted. Further, it is imperative that the spouse who is not bound for the nursing home to have a will that does not leave his or her estate outright to the spouse who is going to the nursing home. Preplanning is paramount in this situation.

Conclusion

Due in part to the rising costs of long-term care and the fact that we are an aging population; Medicaid planning is a growing area of practice for attorneys. However, as evidenced by the content of this newsletter, Medicaid planning requires that you hire an attorney or law firm to ensure that the client avoids the numerous pitfalls that exist in this area.

James C. Mulder is the sole shareholder in Mulder Law Group, P.C. Additionally, he and Robert M. Freedman are owners of the law firm of Mulder & Freedman, P.C. Mulder & Freedman, P.C. limits it practice to Medicaid, Estate and LateLife© planning. Robert M. Freedman is a member in good standing of the National Association of Elder Law Attorneys (NAELA) and is head of the legal research curriculum at the Center for Advance Legal Studies, a paralegal institute in Houston, Texas. James C. Mulder has over thirty years of experience in Wealth Transfer, Tax and Asset Protection planning. He is Board Certified both in Estate Planning & Probate Law and in Tax Law by the Texas Board of Legal Specialization.

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