Life Care Planning: Medicaid planning that doesn’t work

By Sandra W. Reed

Planning to Qualify for Medicaid Is Important

Estate planning for most families is more about strategies to qualify for federal and state benefits than it is for tax planning. That’s because today the value of an individual’s estate must exceed $5 million in order to be subject to estate tax.

Attorney Sandra W. Reed answers your life planning questions.

Attorney Sandra W. Reed answers your life planning questions.

On the other hand, many, if not most, people will face the cost of long-term before they die. Qualifying for governmental benefits can save the individual, at a minimum, thousands and potentially hundreds of thousands of dollars.

Medicaid pays for long-term care in a nursing home or similar facility for an individual who, due to a medical condition, requires 24-hour care. Medicaid also pays for medications that are prescribed for the patient in long-term care.

However, Medicaid benefits are available only if the applicant meets income and asset criteria. Often planning is needed to assure that the individual can meet these stringent requirements. It is essential in planning to choose strategies that work under current law governing Medicaid.

Gifting: The Indian-Giver Factor

Medicaid rules apply a “look-back” period of five years for gifts prior to applying for Medicaid. The applicant is penalized through delay of qualification until the penalty time period is exhausted. The rules regarding gifting changed in 2006. Prior to that date, families commonly adopted the strategy of making periodic gifts to family members to reduce their assets to qualify for Medicaid. This worked because the penalty period began the month of or, in some states, in the month following the month the gift was made. Under the current rules, the penalty period does not begin until the applicant has applied for and met all other qualifications for Medicaid. This means that periodic gifting no longer works.

Persons need not forego gifting as a strategy for Medicaid planning under current rules. However, the applicant using gifting should understand that 100 percent of the gift will not be preserved. The time period for the penalty is calculated based upon a formula dividing the gift amount by a set average per diem cost of care. The person who receives the gift is expected to give back a portion of the gift by paying, during the penalty period, for the cost of care not covered by the applicant’s income.

Because the penalty time period is re-calculated and reduced each month by the payments made by the person receiving the gift on behalf of the applicant, the penalty time period is exhausted before all the gift is used up. Generally, 40 percent to 60 percent of the gift will be preserved.

Annuities Not A New Strategy, But Old Way Won’t Work

Purchasing an annuity has long been a strategy for married couples to convert assets that would otherwise disqualify one spouse from qualifying for Medicaid into income for the spouse who is staying at home. The annuity is established by paying a lump sum in cash in exchange for future income payments during the annuitant’s lifetime. This strategy works because Medicaid does not count the income of the stay-at-home spouse (“community spouse”) in determining eligibility for the spouse entering the long-term care facility.

Medicaid rules do put some restrictions on the type of acceptable annuities. Prior to 2006, families set up annuity contracts which met Medicaid rules and thereby preserved assets for the family if the annuitant died earlier than expected. Under current rules, annuities must be purchased commercially, eliminating the family-established annuity. Medicaid rules currently provide that the income stream created by the annuity must be paid out before the end of the life expectancy of the community spouse. This prevents heirs from being entitled to payments after the annuitant’s death.

Under the old rules (prior to 2006) annuities did not have to be paid out in substantially equal monthly payments, as is required now. This rule change eliminated the practice of establishing an annuity in which monthly payments were paid out for several years with a balloon payment of a single lump sum thereafter of the remaining amount due. The old technique preserved substantial amounts for the heirs, but is no longer an available strategy.

Life Estates Dead As a Strategy

A life estate gives a person the right to live in a home for the remainder of a person’s life. Under the old Medicaid rules, applicants would purchase the right to live in the home of a child or other family member. Since the applicant was entering a facility, he or she did not actually live in the home. The effect of this strategy was to give the sum of money “paid” for the life estate to the child or family member, thus preserving assets that would have otherwise disqualified the applicant from benefits.

Today’s Medicaid rules require that the applicant actually occupy the home where the life estate was purchased, which in practical terms, does away with the strategy.

Enhanced Life Estate Alive and Well Strategy

The strategy of purchasing a life estate to qualify for Medicaid is dead but the strategy of establishing an enhanced life estate in the applicant’s home, otherwise known as a Lady Bird Deed, is alive and well. This strategy creates a life estate with the added power to sell, rent, lease or otherwise dispose of the property during the applicant’s lifetime.

The purpose of transferring the home through a Lady Bird Deed is not a strategy invoked to qualify for Medicaid benefits. The home valued up to the amount of $500,000 is not a counted asset, meaning it does not disqualify the applicant from receiving Medicaid benefits. What the transfer through a Lady Bird Deed accomplishes is removal of the home from the applicant’s probate estate, thus exempting it from claims made by Medicaid after the applicant’s death for reimbursement for amounts Medicaid paid for long-term care.

Sandra W. Reed is an attorney practicing in Glen Rose, of counsel with the Fort Worth elder law firm of Katten & Benson. Phone: 254-797-0211; email:


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