Every one of us tries to save money as we progress in our lives. Often, a huge disappointment comes later in life when we begin to contemplate the need for long-term care (nursing home, assisted living or in-home medical care).
It is therefore reasonable to prepare a plan to handle the potential costs of long-term care. Of course, if we have been saving our whole lives, we may be able to pay for our care with that savings. However, at $80,000 per year for some nursing home services, a life savings can be spent quite quickly. And, many times, a life savings is more than just money and can include generational farms and businesses that no one wants to sell for any reason, including to pay for long-term care.
Thus, people seek the government program that helps pay for long-term care. That government program is broadly known as “institutional Medicaid.”
To be eligible for institutional Medicaid, an applicant must satisfy several significant obligations, including not having a financial net worth over $2,000 and not having given away anything in the last five years to become that poor. Resultingly, it is almost always necessary to decrease an applicant’s financial net worth to satisfy the $2,000 asset limit, even if it means paying out-of-pocket during the five-year lookback period.
The first way for an applicant to become sufficiently poor is to give away assets. This works OK, except for the fact that the giver no longer has ownership of the asset (especially important if the planning is done long before long-term care is anticipated). The other downside of gifting involves giving up the opportunity to help heirs avoid capital gains taxes. Most or all future capital gains taxes for heirs can be eliminated if a person dies owning the assets.
The second way for an applicant to become sufficiently poor is to give away real estate but retain a life estate (that cannot be transferred) in that real estate. This essentially means that a person gives property to others (like the person’s kids) but keeps ownership of that real estate while the person is alive. There are some downsides to this method of impoverishment, though, because Medicaid can still assert a small lien against the real estate after the person on Medicaid dies, even though the person on Medicaid obviously does not own the real estate then due to the person’s death.
The third way for an applicant to become sufficiently poor is to re-title assets into a specialized trust that is often called an irrevocable trust. The trustee must be an immediate family member of the person seeking Medicaid eligibility, and the trust rules must prohibit the applicant from controlling or amending the trust. Notably, not all assets can be part of an irrevocable trust, but an irrevocable trust can involve assets other than real estate.
The second and third ways of becoming sufficiently poor gives applicants the ability to protect their heirs from at least some exorbitant capital gains taxes.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.