Protect Your Assets from Medicaid and Preserve Your Children's Inheritance
Long-term care (LTC) is a term that refers to the services and supports that help people with chronic health conditions or disabilities perform daily activities, such as bathing, dressing, eating, and managing medications. LTC can be provided in various settings, such as nursing homes, assisted living facilities, or at home.
According to the U.S. Department of Health and Human Services, about 70% of people turning 65 today will need some type of LTC in their remaining years.
- The average cost of a private room in a nursing home is $7,698 per month, or more than $92,000 per year. The average cost of assisted living is $4,500 per month, or $54,000 per year. The average cost of home health care is $24 per hour, or $4,320 per month.
· In Maryland, the income limit for a single person applying for Medicaid LTC benefits in 2023 is $2,382 per month.
· The asset limit is $2,500 for a single person and $3,000 for a married couple (if both spouses are applying).
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If one has too much income or assets to qualify for Medicaid, they may have to spend down their savings and assets on their LTC costs before becoming eligible. This can deplete one's life savings and leave little or no inheritance for their children or other beneficiaries.
Many people who have too much income or assets to qualify for Medicaid may wonder if there are ways to protect their assets from Medicaid and still receive LTC benefits. The answer is yes.
Fortunately, there are some strategies that one can use to protect their assets from Medicaid in Maryland and preserve their children's inheritance. However, these strategies require careful planning and professional guidance from an elder law attorney or a certified senior advisor.
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Some of the common strategies to protect one's assets from Medicaid in Maryland are:
1. Asset protection trust: An asset protection trust is an irrevocable trust that holds one's assets and protects them from Medicaid's look-back period and transfer penalties. The look-back period is a five-year period before one applies for Medicaid benefits. During this period, Medicaid reviews any transfers of assets that one made for less than fair market value or for the purpose of qualifying for Medicaid. If any such transfers are found, Medicaid will impose a penalty period during which one will be ineligible for benefits.
○ By creating an asset protection trust at least five years before applying for Medicaid, one can avoid the look-back period and the transfer penalties. However, this strategy requires advance planning and giving up access and control of one's assets.
○ For example, Alice is a 70-year-old widow who owns a house worth $300,000 and has $100,000 in savings. She wants to protect her assets from Medicaid and leave them to her two children. She consults with an elder law attorney who advises her to create an asset protection trust and transfer her house and savings to the trust. Alice names her children as the beneficiaries of the trust and appoints a trusted friend as the trustee. The trustee manages the trust assets according to Alice's instructions and pays her a monthly income from the trust. Alice also retains the right to live in her house for as long as she wants. Five years later, Alice needs LTC services and applies for Medicaid. Since she transferred her assets to the trust more than five years ago, she does not have to worry about the look-back period or the transfer penalties. She qualifies for Medicaid benefits and receives LTC services at home. After her death, her children inherit the trust assets without any claims from Medicaid.
2. Income trust: An income trust is a type of trust that holds one's income and diverts it to pay for their LTC expenses. An income trust can help one qualify for Medicaid if their income exceeds the Medicaid income limit in Maryland.
○ The income limit for Medicaid varies by state, but it is typically below the federal poverty level. For example, in 2020, the income limit for a single person was $2,382 per month in most states. If one's income is higher than this limit, they may not qualify for Medicaid unless they use an income trust.
○ An income trust is an irrevocable trust that receives one's income and distributes it according to the trust terms. The trust must comply with the state's rules for income trusts and must be established before applying for Medicaid. The income in the trust can be used to pay for one's personal needs allowance (a small amount of money that one can keep for their personal expenses), their spouse's needs allowance (if applicable), their medical expenses (including private health insurance premiums), and their share of cost for Medicaid (the amount that one must contribute toward their LTC costs).
○ The income in the trust does not count as income for Medicaid eligibility purposes. However, any income that is left in the trust after one's death may be subject to recovery by Medicaid.
○ For example, Bob is a 75-year-old widower who receives $3,000 per month from his Social Security and pension. He needs LTC services in an assisted living facility that costs $4,500 per month. He has $50,000 in savings, which is below the Medicaid asset limit in Maryland. However, his income is above the Medicaid income limit of $2,382 per month. He consults with a certified senior advisor who advises him to create an income trust and transfer his income to the trust. Bob names himself as the beneficiary of the trust and appoints a bank as the trustee. The trustee distributes his income according to the trust terms and pays for his personal needs allowance ($75 per month), his spouse's needs allowance (not applicable), his medical expenses ($200 per month), and his share of cost for Medicaid ($2,125 per month). The trustee also pays the remaining $600 per month to the assisted living facility. Bob qualifies for Medicaid benefits and receives LTC services in the assisted living facility. After his death, any income that is left in the trust may be recovered by Medicaid.
3. Promissory note or annuity: A promissory note or an annuity is a way of converting an asset into an income stream. By transferring an asset to a family member or a friend in exchange for a promissory note or an annuity that pays them a fixed amount of money over a period of time, one can reduce their assets below the Medicaid asset limit and receive an income that can help pay for their LTC costs.
○ A promissory note is a written promise to pay back a loan with interest. An annuity is a contract that pays a series of payments in exchange for a lump sum. Both a promissory note and an annuity must be actuarially sound, meaning that they must pay out within one's life expectancy. They must also be irrevocable, non-transferable, and non-assignable.
○ The payments from a promissory note or an annuity are counted as income for Medicaid eligibility purposes. However, they can be placed in an income trust to reduce their impact. Alternatively, they can be used to purchase a long-term care insurance policy that can cover some or all of the LTC costs.
○ For example, Carol is a 65-year-old divorcee who owns a car worth $20,000 and has $80,000 in savings. She wants to protect her assets from Medicaid and leave them to her three grandchildren. She consults with a certified senior advisor who advises her to transfer her car and savings to her daughter in exchange for an annuity that pays her $1,000 per month for 10 years. Carol names herself as the beneficiary of the annuity and appoints her daughter as the annuitant. The annuity is actuarially sound, irrevocable, non-transferable, and non-assignable. The payments from the annuity are counted as income for Medicaid eligibility purposes. However, Carol places them in an income trust to reduce their impact. She also uses some of the payments to buy a long-term care insurance policy that pays $3,000 per month for LTC services. Five years later, Carol needs LTC services in a nursing home that costs $7,698 per month. She applies for Medicaid benefits and qualifies because she transferred her assets more than five years ago. She receives LTC services in the nursing home paid by her long-term care insurance policy and Medicaid. After her death, her grandchildren inherit the annuity without any claims from Medicaid.
4. Caregiver agreement: A caregiver agreement is a contract between one and a family member or a friend who agrees to provide care services to them in exchange for compensation. A caregiver agreement can help one pay for their LTC needs at home or in the community, while also transferring some of their income or assets to their caregiver.
○ A caregiver agreement must be written, signed, and dated by both parties. It must specify the type, frequency, and duration of the care services provided, as well as the amount and method of payment. The payment must be reasonable and comparable to the market rate for similar services. The caregiver agreement must be executed before any services are rendered or any payments are made.
○ The payments from one to their caregiver are counted as income for Medicaid eligibility purposes. However, they can be placed in an income trust to reduce their impact. The payments are also subject to income taxes for both parties.
○ For example, Dan is a 80-year-old veteran who suffers from dementia and needs LTC services at home. He receives $2,000 per month from his VA pension and has $10,000 in savings. He wants to protect his assets from Medicaid and leave them to his son. He consults with an elder law attorney who advises him to create a caregiver agreement with his son who agrees to provide care services to him at home in exchange for $1,500 per month. Dan and his son sign and date the caregiver agreement that specifies the type, frequency, and duration of the care services provided, as well as the amount and method of payment. The payment is reasonable and comparable to the market rate for similar services. The caregiver agreement is executed before any services are rendered or any payments are made. Dan transfers his savings to his son as a gift and places his VA pension in an income trust. He applies for Medicaid benefits and qualifies because his income and assets are below the limits. He receives LTC services at home paid by his son and Medicaid. After his death, his son keeps the payments without any claims from Medicaid.
5. Spousal transfers: A spousal transfer is a transfer of assets from one spouse to another spouse who is not applying for Medicaid. Spousal transfers are exempt from the look-back period and the transfer penalties, meaning that they do not affect Medicaid eligibility. However, spousal transfers are subject to the spousal impoverishment rules, meaning that there are limits on how much assets and income the non-applying spouse can keep.
○ The spousal impoverishment rules vary by state and change every year. In 2020, the asset limit for the non-applying spouse was $128,640 in most states. The income limit for the non-applying spouse was $3,216 per month in most states. These limits are adjusted for inflation every year.
○ Spousal transfers can help protect some of the couple's assets from Medicaid while allowing one spouse to qualify for benefits. However, they may also reduce the income and assets available for the non-applying spouse's needs.
○ For example, Eva is a 68-year-old wife who suffers from Parkinson's disease and needs LTC services in a nursing home that costs $7,698 per month. She receives $1,500 per month from her Social Security and has $200,000 in savings. Her husband Frank is a 70-year-old retiree who receives $2,500 per month from his pension and has $50,000 in savings. He wants to protect their assets from Medicaid and leave them to their daughter. He consults with an elder law attorney who advises him to transfer their savings to his name and apply for Medicaid benefits for Eva. Frank transfers their savings to his name and applies for Medicaid benefits for Eva. He qualifies for the spousal impoverishment rules and can keep $128,640 in assets and $3,216 in income. He also pays $1,000 per month to the nursing home as Eva's share of cost for Medicaid. Eva qualifies for Medicaid benefits and receives LTC services in the nursing home paid by Frank and Medicaid. After Eva's death, Frank keeps their savings without any claims from Medicaid.
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These strategies are not mutually exclusive and can be combined to achieve optimal results. However, they are not suitable for everyone and may have tax, legal, and financial implications. Therefore, one who is considering these strategies should consult with an elder law attorney or a certified senior advisor who can advise them on their options and help them implement their plan.
If you or your loved ones need LTC or anticipate needing it in the future, it is advisable to consult with an elder law attorney or a certified senior advisor who can help you protect your assets from Medicaid and preserve your children's inheritance in Maryland.
Citations
1. Maryland Department of Health (2020). Medical Assistance Long Term Services and Supports Program: Eligibility Overview. Retrieved from 10/22/23.
2. Maryland Department of Health (2020). Medical Assistance Long Term Services and Supports Program: Income Trusts. Retrieved from 10/22/23.
3. Maryland Department of Health (2020). Medical Assistance Long Term Services and Supports Program: Spousal Impoverishment Rules. Retrieved from .
4. U.S. Department of Health and Human Services (2020). What is long-term care? Retrieved from 10/22/23.
5. U.S. Department of Health and Human Services (2020). How much care will you need? Retrieved from 10/22/23.
6. U.S. Department of Health and Human Services (2020). Who pays for long-term care? Retrieved from .
7. Genworth (2019). Cost of Care Survey 2019: Maryland. Retrieved from 10/22/23.
