Medicaid Planning

FAQ Medicaid Planning


Q: Should I gift my house to the kids so I can go on Medicaid?

A: Your house is an “exempt” asset for Medicaid purposes, meaning you can keep the house and still be on Medicaid. After you die, Medicaid has authority to recover the funds spent on your behalf from your assets owned on date of death, such as your house. If you are married, Medicaid will defer recovery until your spouse dies or the house is old.

Q. Should I transfer my house and other property to my spouse?

A. Not in Louisiana. The Louisiana Supreme Court has ruled that Medicaid may recover from your spouse, or your spouse’s estate, the value of any of your property ever owned by you and your spouse as community property.

Q. So what should I do, if anything, before going on Medicaid?

A. There are really no easy answers. The following are some considerations:

1. Average Assisted Living/Nursing Home Costs.

Before you make a decision about transferring assets out of your estate, you should first consider the facts about assisted living to see how it applies to your family situation. You may determine that the chances of a Medicaid recovery against your property are remote. The average length of stay in an assisted living facility is 30 months. The national average cost is about $3,131 per month, or $93,930 for the average length of stay. The average nursing home stay is six months, costing about $40,000, although some nursing home costs are often paid by Medicare.

2. Eligibility for Medicaid.

Another consideration is whether you will actually qualify for Medicaid when the time comes. You will only be eligible for Medicaid if the value of your assets is $2,000 or less, not counting your home, automobile, and some other smaller items. Your monthly income has to be less than $1,800. However, if your income exceeds that amount, and you would otherwise qualify, we can establish a trust that, essentially, funnels almost all of your income to Medicaid so you can qualify. Medicaid is a little more generous in allowing you to keep resources and income if one spouse is healthy, living in the home, and the other spouse needs to be in assisted living.

3. Gifting Assets.

You cannot just give away your assets to qualify for Medicaid. In essence, Medicaid ignores any gift you have made in the 5 years before you apply. Here’s how Medicaid does it: it takes the value of what you gifted during the five year “look back” period and divides it by a monthly Medicaid rate. The number of months derived, are the number of months you must wait to get on Medicaid. For example, if you transfer $50,000 during the previous five years, you would be ineligible for Medicaid for about 16 months.

4. Spending Down.

You can “spend down” to reduce your assets to $2,000 without penalty. However, “spending down” means that you actually consume the asset or turn it into an exempt asset. So, for example, you are “spending down” if you go on a big trip around the world, and lose a pile of money at a Monte Carlo casino. You are not spending down if you buy a big yacht to take you on your around the world adventure. You can, however, effectively “spend down” by putting an addition on your house, or if you buy a fancy car, because those items are exempt from consideration as a resource.

5. Medicaid Recovery.

The State keeps very good track of how much it has spent to keep you on Medicaid, and it expects to be paid back after you and your spouse pass away. Medicaid will generally not attempt to recover assets until both spouses are gone. Thus, Medicaid will not kick you out of your home! When spouses have passed, Medicaid will attempt to recover from the estate as much of its expenditures as possible. So, for example, Medicaid will put a lien on the family home. If the kids sell the home, Medicaid will take its share from the sale. If the kids don’t sell the home, then Medicaid will eventually foreclose its lien and have the house sold at auction. If, however, there is no money left in your estate, then Medicaid is just out of luck. It cannot obtain recovery from the kids or other heirs unless those kids received an inheritance from you.

6. Ways to Shelter Assets.

To accomplish the goal of sheltering assets from Medicaid recovery, you must actually transfer the assets out of your estate and you must wait five years for the transfer to be effective. The following are various means to accomplish the goal:

A. Complete Gift. You can make a present and complete gift of one or more assets to your kids or others. You simply gift deed the house, transfer ownership of the car, or simply write them a check. If the value of the gift to any one individual is more than annual gift exclusion amount ($14,000 for 2013), you are required to file a gift tax return. You will not pay any tax unless and until the total of all your gifts during your lifetime exceeds the unified gift and estate tax exclusion amount ($5,120,000 for decedents dying in 2013). A present and complete gift exposes the asset to the creditors of the persons you gift to. Thus, if you plan to gift your house to your kids, but still live in it, beware: any creditor of a child could force your house to be sold and you would be out in the cold!

B. Gift to Irrevocable Trust. You can transfer assets to an irrevocable trust – a trust that cannot be changed, revoked or the principal (corpus) distributed back to you or your spouse. Typically, the principal is distributed to the children upon your and your spouse’s death. This gift is subject to the 5 year “look-back” period. You and your spouse may, however, immediately receive the income from the trust for life. An independent person or a future beneficiary of the principal (or both) should be appointed trustee. Assuming the value of the trust exceeds the annual gift exclusion amount ($14,000 in 2013), you will need to file a gift tax return. Note, however, that Medicaid can reach the income from the trust. If you gift your house, you will also need to arrange to lease back the house from the trust so long as you live there.

C. Gift to Partnership. Another means by which to gift assets is through a partnership or Limited Liability Company (LLC). You would transfer one or more of your assets – say your rental properties or vacation cabin – to the LLC. You would start out owning 100% of the company. You then gift shares to your kids or other beneficiaries. You can gift the shares all at once or over time. Some couples gift $26,000 in share value each year to each child, which is the maximum annual gift exclusion amount. Others gift more and then file a gift tax return. It’s up to you. Medicaid will consider the value of the shares you own as a resource, so probably you would want to gift almost all of your shares early-on. The gifts are subject to the 5 year “look-back” period. If you live in a house owned by the LLC, you’ll need to arrange a lease. Through an “operating agreement,” you can remain in control of the company even though you own only a tiny share of the company.

D. Qualified Personal Residence Trust. Your primary residence or vacation home can be placed in a Qualified Personal Residence Trust (QPRT). A QPRT is an irrevocable trust. The future beneficiaries of the trust would typically be your kids or other heirs. Once transferred to the trust, the trust would own your home but you would retain a right to live in the home for a term of years, say, 5 years or 10 years or even more, depending on your age. You would pay the taxes and maintenance costs. When the term of years expires, and if you are still alive, you would have to pay rent to the trust to remain in your home. However, the trust can be structured, using what is called a Grantor Retained Annuity Trust (GRAT), so that you will effectively be paying rent to yourself. A caution: if you go on Medicaid and die before the term of years has expired, the residence will be brought back into your estate and Medicaid will be able to recover its costs from your estate. Also, the trust must be structured so that you may not revoke the QPRT during the term of years.

7. Tax Issues and Mortgage Issues.

A. Property Taxes. When transferring a personal residence, you should consider its impact on your real property taxes. If you retain a life estate or use a QPRT, then you would continue to qualify for Idaho’s homeowner’s exemption. A straight out gift to the kids would disqualify the property for such an exemption. A transfer to an irrevocable trust or LLC would expose the property to deferred taxes under a timber exemption if the land is held under the “bare land and yield” program. The trust could, however, retain the timber exemption so long as the property qualified in all other respects. However, you may need to obtain another professional forest management plan.
B. Capital Gain Taxes. There is also the matter of capital gains tax exposure, which is approximately 19% of the gain (federal and state combined). For example, if you pass your house to your kids at death and they sell the place the next day, there is no capital gains tax due (it’s called the “step up” in basis). If, however, you gift the house during your lifetime and the kids sell it when you die, they will be exposed to capital gains taxes on the difference between the sale price and what you paid for the house.
C. Mortgage Restrictions. If you have a mortgage on your property, you are typically restricted from transferring the property without the lender’s approval. Although transfer to a QPRT is generally permitted by law, other transfers may expose you to a default on your deed of trust, allowing the lender to “call the note.”
D. Home Equity Loans. Some people think of the equity in their home as a “last resort” fund in the event of an emergency. It’s worth remembering that if you have given away your home, you will not be able to borrow on its equity.

8. A Final Thought, Think Hard!

Giving away your home and/or other assets is a very serious matter. You may want to move to a new location, or you may decide that you want to borrow money on your home to hire in-home care, rather than go on Medicaid. You could get into a conflict with your kids or other heirs to whom you have given the property. A child or heir could go bankrupt and you could find a creditor trying to take away your home or other asset. To be clear, you lose a measure of independence and flexibility when you engage in this sort of asset protection planning. So, there’s risk involved. Only you can determine whether the risk is acceptable.