Recently, I have had a couple of clients come into the office and tell me that in order to qualify for future Medicaid benefits, they should transfer their house to an irrevocable trust and simply wait out the penalty period. While this seems like a simple and straight forward option, it is certainly not, and since I have had a couple people come in after being told it was the right thing to do, I feel it is worthy of a deeper discussion. So, let's start from the beginning.
Medicaid is the largest payor of long-term care (nursing home care) in the United States. This is primarily due to the exhorbitant cost of service; in some areas a facility can easily cost over $6,000 per month. Rather than pay all that out of pocket, sometimes it is better to let Medicaid pick up the tab--other times there is no other alternative. Still, the risk in using Medicaid benefits (without proper planning) is that Medicaid can lay a claim against a recipient's probate estate and recoup its costs from the probate assets. This is where the trust idea comes into play.
The idea is that you transfer your home to a trust and wait out the Medicaid "look-back" period. Once you are past the look-back period, the home (which is in the trust) will not be part of the recipeint's probate estate after death, and therefore, free from the claws of Medicaid. The problem with this is two fold: First (1) the home loses its exempt asset status when transferred to a trust; and Second (2) the applicable look-back period.
(1) The Home's loss of Exempt Status:
It is important to note that Medicaid requires an applicant to have less than $2,000 in countable resources in order to qualify for benefits. Ordinarily, the homestead of an applicant or couple is exempt from this determination. If it wasn't, no one would ever be certified for Medicaid. However, the home loses its exempt status if it is transferred to a trust. This is because the home is only exempt so long as it is in the applicant's name or the name of his/her spouse. The idea is that Medicaid will be able to place a claim against it when the recipient dies. This means that if you transfer your home to a trust and then need to apply for Medicaid within 60 months of that transfer, the full value of the home in the trust will be counted against you for application purposes. The application will be denied until either the value of the home is spent down (which would be difficult to do) or the home is transferred back to the applicant. Since the only self-settled trust that would exempt the applicant's assets after the penalty period is an irrevocable trust, this creates a huge problem because the house could not be transferred back to the applicant. This brings us to the other issue.
(2) The 60 month "look-back" period:
Many of you know and have heard of the Medicaid look-back period. Basically, it works to create a Medicaid penalty for any transfers occuring within a certain time period before the Medicaid application date. In 2005 Congress passed the Deficit Reduction Act (DRA). Part of the act's provisions was an extension of this "look-back" period from 36 to 60 months--meaning that if an applicant transferred assets to someone or something, i.e. a trust, within 60 months of making an application for Medicaid benefits, Medicaid will levy a penalty on that applicant to the tune of $142.92 per day up to the transferred amount. However, even more detrimental was the change to the start date of the penalty. Before the DRA the penalty started from the month of transfer; however, after the DRA the penalty doesn't begin until the month the applicant is in a facility and would have received benefits, but for the penalty.
These two issues work together to create a real risk losing Medicaid eligibility entirely when considering the transfer of a house to a trust. It sets up the "perfect storm" if you will. Imagine you tranfer your home worth $120,000 to an irrevocable trust in order to begin waiting out the 60 month look-back period. However, after just two years you find you need to make an application for benefits based on long-term care needs. Now, the home, which would have been an excluded resource if it were still in your name, is counted as a $120,000 uncompensated transfer against you and Medicaid assess a penalty of (120,000/142.94) = 839 days; or 2.3 years. During this time, you (or your family) will have to pay for the nursing home out of pocket--something that may not be financially feasible. To make matters worse, because the trust is irrevocable, you cannot transfer the home back to your name in order to fix the problem.
Luckily, there are better options in Texas. One way may be to use what is called a Lady Bird Deed. This is a deed with a special type of life estate reservation. It grants the grantor the right to nullify the conveyance, name subsequent or alternate grantees, etc. Because these powers are reserved and because the conveyance is not final until death, Medicaid views this as if the home were still in the Grantor's name. That way, the Grantor/Medicaid applicant gets to exclude the home for application purposes, and since the home is deeded prior to death, when the Medicaid recipient passes away, Medicaid cannot place a claim against it as a probate asset. Win win.
My firm is dedicated to helping seniors protect their independence and prepare for these types of issues. We work to make sure our planning fits your values, needs and intentions. If you have questions about protecting your assets from Medicaid or how to best plan for use of state benefits, give our office a call or visit us online at www.councilfirm.com. Thank you.