14 Oct Success Story Of The Month – Spotting The Issues In A Medicaid Planning Case
Similar to tax planning, where the client often wants to pay as little taxes as possible and plan accordingly, many want to preserve as many resources as possible while obtaining Medicaid assistance so that the government will help pay for the cost of care in addition to covering drug costs.
Long-term care Medicaid, whereby the government helps pay for long-term care costs, is means-tested (eligibility is determined by the amount of countable resources). Certain assets (such as cash, checking, savings, and some investment accounts) count as a resource, and certain assets (such as homestead, one car, pre-need funeral, and some retirement accounts) do not count as a resource. As a result, planning often involves changing the nature of the resource from being countable to being non-countable. Timing is often crucial as well. Furthermore, planning is also needed so Medicaid is not lost after obtaining benefits, in addition to avoiding a successful claim by the state for recoupment of benefits advanced after the Medicaid recipient’s death.
Facts:
Their wife, 60, has some dementia and will likely need skilled care in the year 2025. She and her husband own a business together, although she can no longer work. The husband, 65, still works and is paid by the business. Husband has a 401(k) that is worth around $350,000. Their home is worth $800,000. They have $50,000 between checking and savings accounts that are jointly owned.
Issue No. 1 – Since she is under 65, apply for Social Security Disability
One requirement of obtaining long-term care Medicaid is proof that the applicant is disabled enough for skilled care. If over 65, the state determines if there is a medical need for this level of care, and there is little waiting period. However, if under 65, the state often requests proof that the government has determined disability. Although Medicaid has a disability determination unit to determine disability if someone is under 65, it is often quicker to get Social Security Disability (although that takes a long time as well). Furthermore, if you have a Social Security Disability, then you can get Medicare even before age 65.
Issue No. 2 – Make business profitable
A business essential for self-support is non-countable. The government looks at Schedule C of the applicant’s tax return to see if it made a profit. As a result, a review of expenses should be made to make certain the business is profitable when doing the 2024 tax return.
Issue No. 3 – Transfer the applicant’s interest in the business to her spouse
An exception to Medicaid’s 5-year look-back period (whereby uncompensated transfers within five years could be penalized) is a transfer by martial partition (if community property) from one spouse to the other. This often should be done for a few reasons: (a) if the business makes money, it will all go to the non-applicant spouse who is not limited in the monthly income that can be received; (b) if income was still in the name of the applicant spouse, then that income would be part of the co-payment to the facility since the income of the husband is greater than the allowed limit for there to be any diversion from his wife to him; (c) the husband can then revise his will so that is he dies first, then assets of the business could go into a supplemental needs trust which would not count as a resource.
Issue No. 4 – Deed with marital partition
Normally a ladybird deed or a transfer on death deed is used to avoid Medicaid estate recovery. The equity value in the homestead if the applicant is single is $713,000. There is no equity limit in the home if the applicant is married. However, in this case, if the husband died first, eligibility would be lost since the equity value of the homestead is greater than $713,000.
So, would a ladybird deed, transfer on death deed, or deed with marital partition work so that the home is either below the equity limit or does not count if the husband died first? If the couple did a joint ladybird deed, it may depend on how the deed is drafted. There was a Texas Supreme Court decision last year that a joint ladybird deed vests in the grantee after one spouse dies as to ownership interest of that deceased spouse. So, if the deed is not a joint with right of survivorship deed inside the joint ladybird deed with the spouse, it could be argued that ½ of the home was vested in the grantee reducing equity to being below the limit.
The Texas Constitution granting a life estate to the surviving spouse would be a problem for most title companies if there was a deed with a marital partition (assuming the property is community property). So, additional language regarding Medicaid eligibility should be added to the deed so that some title companies may accept the deed with marital partition as the property of the husband, and then his interest would pass by his own estate planning (i.e., will with supplemental needs trust benefiting the wife).
Issue No. 5 – Converting the 401(k) to an IRA
Presently 401(k) counts as a resource, but an IRA does not if the owner is taking required minimum distributions (RMDs). So, it is common to rollover the 401(k) to an IRA. However, in this case, the husband is only 65, so minimum distributions are not required until he is older. For the retirement account (IRA) to not count when there is required minimum distributions to be at a later age, the investment within the IRA must be an annuity.
Issue No. 6 – Timing of annuity purchase within the IRA
Since the IRA counts as a resource until the annuity is purchased and since the government looks at the date of institutionalization (the “snapshot date”) to determine the protected resource amount, which is ½ of the countable resource amount not to exceed $154,140, then the $350,000 retirement account should not be converted into an annuity until after institutionalization. In our case, the $350,000 retirement account and $50,000 would count as of the snapshot date (the business would not count since it was being made profitable, and the home does not count since the couple is married). As a result, the couple would have $400,000 of countable resources as of the snapshot date. Since the maximum protected amount is $154,140 (sometimes the protected resource amount can be expanded, but in this case, it could not since the husband’s monthly income exceeds $3,853.50), the client will simply change the 401(k) into an IRA and bring the annuity within the IRA after the snapshot reducing the countable resources from $400,000 to $50,000 ($400,000 – $350,000) creating eligibility while still retaining all resources.
Similar to tax laws in savings taxes, by going within the rules created by the government, Medicaid planning often utilizes the rules of the government to achieve the asset preservation goals of the client. As the client said, “I have always paid my taxes and now it is time for the government to do something for me”. Some say the system is unfair since Medicare will pay for acute needs, but it will not pay for chronic care. Others feel like it is unfair that they worked hard to save, and they feel penalized for saving (as Medicaid is means-tested) since they have to spend down their resources while others who spend frivolously benefit – the opposite of the grasshopper and ant fable. As a result, it is not unusual to plan for potential long-term care asset preservation.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.