Medicaid & The Dangers of Premature Asset Transfers
An Irrevocable Medicaid Asset Protection Trust is mainly for those savvy Estate Planners who plan for the possibility that long-term inpatient health care may happen sometime in the future.
Most Minnesotans will never need the benefits of an Irrevocable Medicaid Asset Protection Trust.
However, some WILL. And for them, when the time for costly long-term inpatient healthcare comes, pre-planning could mean the difference between leaving a legacy and leaving nothing...
And for those that didn't pre-plan, once the costs for inpatient health care are realized, panic often ensues - resulting in poor decision-making relating to asset transfers. Poor decision-making that, instead of saving money, will usually result in them shooting themselves in the foot by costing themselves, and their beneficiaries, more money than if they had done nothing at all.
But losses aren't only from bad, or uninformed, decision-making. Minnesota Medicaid is a "means-tested" assistant program with a myriad of rules for determining eligibility.
Therefore, seemingly simple transfers of cash, assets or even debt forgiveness can result in an unintentional disqualification from Medicaid benefits.
How can you prevent this from happening to you and your family? As the saying goes "knowledge is power" so read on and get yourself knowledgeable on this subject.
I don't need a Medicaid Trust. I can just transfer the assets directly to my beneficiaries now.
Unfortunately, some think they don't need to waste money by paying some attorney to set up a Medicaid Trust when they can just transfer the assets to their beneficiaries themselves.
As the family home is usually a person’s largest asset, let’s use it to work through some scenarios to illustrate why that line of thinking usually isn't such a great idea:
DISCALIMER: I am NOT an accountant, tax professional, financial adviser, or real estate expert. These are very general and generic examples of possible scenarios – and there are usually exceptions to every rule. If you have any specific questions about the tax or financial implications of a Medicaid Asset Protection Trust, please consult your financial adviser.
SCENARIO 1: You are 1) single, or your spouse passed away before you, 2) you own your home, 3) you do not have a Medicaid Asset Protection Trust, 4) you now need long-term care, and 5) you did transfer your home to beneficiaries – BUT less than 5 years before needing long-term care:
- The transfer of your home will likely trigger a 'Medicaid Penalty Period' where you will be ineligible for Medicaid coverage.
- For example: if the fair market value of your home was $150,000, Medicaid would use the calculation $150,000/$7,228 = 20.8. ($7,228 is known as the 'Medicaid Penalty Divisor' - set by MN Statute, 2018 value)
- Therefore, you would likely not be eligible to receive Medicaid coverage for 20.8 months.
- You would need to pay for your long-term care yourself during those 20.8 months, and if you don’t have enough remaining assets to pay for your care, the nursing home may attempt to recover your home and then force its sale to reimburse/pay for your care (because they will argue you never should have transferred it in the first place).
SCENARIO 2: You are 1) single, or your spouse passed away before you, 2) you own your home, 3) you do not have a Medicaid Asset Protection Trust, 4) you now need long-term care, and 5) you did transfer your home to beneficiaries – more than 5 years before needing long-term care:
- The problem here is though the transfer will not trigger a 'Medicaid Penalty Period', it will cause the beneficiary who received the property to lose their “step-up in basis.”
- Again, we will use an example to illustrate: you bought your house many years ago for $50,000, but it is now worth $150,000. YOUR tax basis for the house is still $50,000 – regardless of the present fair market value. If you transfer the house to a beneficiary while you are still living, you will also transfer the $50,000 tax basis – meaning if they later sell the house for its fair market value of $150,000, they will have to pay the capital-gains taxes on the $100,000 increase in value. Not a good outcome for your beneficiaries as you basically gave a good portion of the value to the government in the form of unnecessary taxes.
- However, if you had placed the home into a Medicaid Asset Protection Trust and waited to transfer the property upon your passing, the beneficiary will receive the house with a “step-up” in tax basis – meaning that it’s tax basis will be upgraded to the fair-market value at the time of your passing ($150,000 in this scenario). Now if they later decide to sell the property for its fair market value of $150,000, they will have the new tax basis of $150,000 so will not pay capital-gains taxes on the sale. A good outcome for your beneficiaries.
SCENARIO 3: You are 1) single, or your spouse passed away before you, 2) you own your home, 3) do not have a Medicaid Asset Protection Trust, 4) now need long-term care, and 5) did not transfer your home to beneficiaries:
- REMEMBER, the 2016 average monthly cost of long-term care in MN was $7,361, and you will not be eligible for Medicaid until you reduce your assets to below $3,000.
- So, once any cash you had is quickly exhausted on your care, your home will likely need to be sold, and the proceeds used to pay for your long-term care
- You won't be eligible for Medicaid until you get your assets once again below $3,000
- There will be no house to pass to your beneficiaries, you basically gave it to the long-term care facility.
SCENARIO 4: You are 1) married, 2) you own your home, 3) you do not have a Medicaid Asset Protection Trust, and 4) you now need long-term care:
- The good news is you can likely transfer the house to your spouse as an exempt transfer.
- He/She can then file a Spousal Refusal with Medicaid and the house will probably be protected and you should qualify for Medicaid coverage.
- However, though YOU may have dodged the long-term care payment bullet, all you really have done is now placed your SPOUSE in the cross-hairs.
- How? Well, your spouse is likely of a similar age, which means that it is plausible that he/she will also need long-term care in the not too distant future. And since you decided to neglect planning for long-term care, when it is his/her turn to enter long-term care, all the scenarios we discussed above will apply to them because they will be unable to transfer anything to you.
Why should I use a Medicaid Trust?
As you can see, there are many factors to take into consideration when deciding if a Medicaid Asset Protection Trust is for you.
But for the vast majority of people who may one day need long-term care, a Medicaid Asset Protection Trust is absolutely their best option for protecting their assets.
A Medicaid Asset Protection Trust doesn’t only apply to protecting your home – it can be used to protect a wide-variety of assets of even modest value. It is simply a tool to help you pass your life's work to your beneficiaries instead of a long-term care facility or the government.
You have spent your entire life accumulating the assets you have. Did you do it so you could give it all to a long-term care facility, or government, in the last few years of your life? Or did you do it so you would leave a legacy of smart decision making and assets which will pass to your love ones and beyond?
Don’t shoot yourself in the foot – make a plan!
PLEASE NOTE: I applaud your seeking out of Estate Planning information, but this article is for informational purposes only and is not a substitute for actual consultation with a qualified attorney.
You should not act on anything you read here without first consulting myself or another Minnesota Estate Planning attorney. Small details in your unique situation can result in a drastically different outcome.
Still have questions? Ready to get started?
Contact the Maki Law Firm today for your FREE Consultation!
Where to next?
Related Minnesota Medicaid Posts:
A Minnesota Medicaid Asset Protection Trust is an Irrevocable Trust designed to remove a Medicaid applicant’s ownership of non-exempt assets to qualify them for Medicaid coverage.