03 Nov 5 Reasons Why You Do Not Need To Divorce To Get Your Spouse On Medicaid
Since the cost of long-term care (i.e., nursing home care or care at home, etc.) is so great (average monthly cost is in excess of $7,000 per month) and since most have inadequate income, resources and/or long-term care insurance to pay for such care, many seek Medicaid which helps pay for some or all of the costs of care. However, Medicaid is “means-tested” (the government looks at the couples’ resources to determine eligibility prior to its assistance). As a result, the community spouse (the “well” spouse who lives in the community – not the nursing home) often believes they need to divorce to protect their assets from “spend-down” so they can have enough assets for the remainder of his or her life. Medicaid disregards pre and post nuptial agreements and community vs. separate property since it is based on federal (not state) law.
The following reasons for not getting a divorce in connection with Medicaid are as follows:
- Federal and state laws to prevent spousal impoverishment:
Although the maximum protected resource amount (exclusive of non-countable resources) in year 2022 is $137,400, it can often be expanded if the couple’s total gross monthly Social Security, pension, wages and annuitized annuity income is less than $3435 per month. There is a formula whereby the lower the income of the couple, the greater amount of permitted expansion. The formula is interest-rate sensitive. As a result, more can be protected with lower interest rates.
- Some assets do not count:
If you are married, the value of the homestead does not count as a resource regardless of value. Traditional IRAs in which a required minimum distribution has been made will not count as a resource (although the distribution will be considered as income). A preneed funeral, burial spaces for certain family members, one vehicle, personal property items, term life insurance, limited mineral interests and a business for self-support are some of the resources that do not count. So, if the majority of resources are non-countable and the goal was to protect resources, divorce becomes less of a need.
- Medicaid compliant annuities:
Even if the income is too great for expansion, often the community spouse can purchase a certain type of annuity that doesn’t count as a resource. The annuity would be considered as income. This would likely affect a possible diversion of income from the institutionalized spouse to the community spouse.
- Certain transfer strategies are not penalized:
There is no transfer penalty between spouses (since the state looks at the resources of both spouses).
In fact, the rules require that countable resources of the institutionalized spouse be transferred to the community spouse within one year. Furthermore, if the couple plans in advance if they have more countable resources than the allowable limit, resources can be transferred into an asset protection trust whereby the couple could retain elements of control (so the trust is tax-neutral treatment) subject to Medicaid’s look-back period. The assets held in the trust then would not be countable if the trust is properly drafted.
- Loss of marital benefits:
There are certain governmental benefits, both federal and state, that are offered to someone who is married. For example, if one spouse owns his or her home as separate property, the surviving spouse has a right to live there until such surviving spouse dies or until he or she abandons the home. Furthermore, if you are married and your spouse dies, you generally get the higher of the Social Security benefits (spouse or yours). Also, if you were married less than 10 years before divorce, you would lose the option to collect on your spouse’s Social Security benefits. Additionally, there would be a loss of step-up in basis (for example, your homestead has highly appreciated) if a couple got divorced. Texas has a full step-up if one spouse dies since it is a community property state. So if one is married, the surviving spouse’s new basis would be the value of the property as of the date of the first spouse to die (no capital gains tax on the appreciation from the date of acquisition to the date of the first spouse to die which would not be applicable if divorced).
There are numerous other reasons why a couple should not get divorced if the goal is simply to obtain eligibility from Medicaid.
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