Minnesota Estate Planning with the Maki Law Firm

What IS a Minnesota Medicaid Asset Protection Trust?

A Minnesota Medicaid Asset Protection Trust is an Irrevocable Trust designed to remove a Medicaid applicant’s ownership of non-exempt assets so that person-in-need can qualify for Medicaid’s long-term in-patient healthcare coverage.

If a person-in-need qualifies for Medicaid, 100% of their long-term in-patient healthcare costs may be paid by Medicaid. This is an extremely valuable benefit for anyone facing the ever-rising costs of long-term in-patient healthcare.

An irrevocable Minnesota Medicaid Asset Protection Trust is often the best option to protect the assets of anyone who may eventually need long-term managed healthcare – such as from a nursing home or assisted-living facility – while still maintaining Medicaid eligibility. Medicaid requires that if the Medicaid applicant's assets are not protected, they must be used first to pay for the person-in-need’s healthcare before Medicaid will provide any financial assistance.

Medicaid is only available to those whose income and assets are below very specific statutory limits. All Medicaid applicants will have their assets and income scrutinized via means-testing. Therefore, an irrevocable Minnesota Medicaid Asset Protection Trust is an indispensable part of long-term healthcare planning because 5-years after transferring assets into the Trust, ALL of those Trust assets become INACCESSIBLE to Medicaid for use in their mean-testing calculations. Essentially, those assets are removed from the person-in-need’s financial estate.

Some may say the downside of an irrevocable Medicaid Asset Protection Trust is that the person-in-need will no longer have access to, or control of, most assets placed into the Trust. But one needs to consider that it is BECAUSE those assets are inaccessible to the person-in-need that they are ALSO inaccessible to Medicaid!

Additionally, please know that the person-in-need CAN still retain certain rights over the assets placed in the Trust, such as the right to use and live in their home as long as they wish (which can be for the remainder of their lifetime if they never do need long-term in-patient healthcare), and they CAN receive any income generated by the Trust.

PLEASE NOTE: 5-years after transfer into the irrevocable Medicaid Asset Protection Trust those assets within the Trust are NOT available to Medicaid for means-testing calculations, HOWEVER, the income generated by the assets IS available for mean-testing calculations.*

*There are OTHER methods available to also remove any excess income from the person-in-need’s financial estate, such as a Pooled-Income Trust – but that is a separate topic not covered in this article.

What are the Main Purposes of an irrevocable Medicaid Asset Protection Trust?

Though an irrevocable Minnesota Medicaid Asset Protection Trust has many benefits, the most common purposes include:

1) Pre-planning to remove assets from the potential Medicaid applicant's financial estate which would otherwise make them ineligible to receive Medicaid’s long-term in-patient healthcare coverage - when/if it is ever needed.

Medicaid eligibility is determined by means-testing. This means that if the applicant has assets OR income above Medicaid’s eligibility limits, Medicaid will determine the applicant “has the means” to pay for long-term in-patient healthcare themselves – that the applicant doesn’t NEED Medicaid’s assistance.

If Medicaid makes such a determination, the applicant will have to use up whatever cash they have and liquidate their assets to pay for their own long-term in-patient healthcare until they have spent everything down to a point where they DO need Medicaid’s assistance. (NOTE: in 2016 the average cost for semi-private room in a Minnesota nursing home was $7,361 per month)

To avoid this scenario, assets the potential Medicaid applicant doesn't need for daily living, but also doesn't yet want to transfer to their beneficiaries, are instead transferred into an irrevocable Minnesota Medicaid Asset Protection Trust – putting them out of reach of Medicaid’s means-testing.

So you can easily see that without proper planning for one’s potential need for long-term in-patient healthcare, a person’s lifetime of work can quickly disappear simply paying for a couple years of long-term in-patient healthcare. Meaning their life’s work will go to a healthcare facility and not to their heirs.

But with proper planning, the potential applicant’s assets and/or income can be removed from the means-testing calculations. This means that the applicant can qualify for Medicaid AND still give their life’s work to their heirs.

2) Transferring the potential Medicaid applicant's assets in such a way as to preserve their value as well as any benefits related to the assets.

EXAMPLE: a problem with transferring the deed to an unmarried/widowed person-in-need’s home.

If the person-in-need owns a personal residence, is no longer married (or their spouse passed away before them), and requires long-term in-patient healthcare, their home will NOT be exempt from Medicaid’s means-test calculations. Therefore, if the person-in-need still owns the home at the time they apply for Minnesota Medicaid benefits, the fair market value of that home will more than likely lead to their Medicaid application being denied for being above the eligibility asset limit (currently $3,000 for a single applicant).The person-in-need will then likely have to sell their home and use the proceeds to pay for their long-term in-patient healthcare until their assets fall below the $3,000 asset limit threshold.

In an effort to avoid the scenario of having to sell their home to pay for their future long-term in-patient care, some may think, “I can just transfer my home to my child now – because they are just going to get it anyway. My great idea will save so much money because I won’t have to pay some lawyer to set up a Medicaid Asset Protection Trust!”

To that person I say: Well, OK, doing so can potentially save YOU some money now; however, you are setting up your child for a large tax obligation that will cost them MORE money in the end. Therefore, saving yourself a quarter now can cost your child a dollar later. So it is NOT such a great idea – unless you think it is a great idea to reduce your child’s inheritance because you want to give that money to the government in the form of taxes.

How is that possible? Well, let’s say the potential Medicaid applicant originally purchased their home years ago for $50,000, but it is now worth $150,000. If they then decide to just gift the home to their child now, without putting it into an irrevocable Medicaid Asset Protection Trust (and the potential Medicaid applicant later does need Medicaid benefits), the home will keep the “tax basis” of the original purchaser (the potential Medicaid applicant) even after transferring the deed.

So in this example the tax-basis of $50,000 (the potential Medicaid applicant’s original purchase price) will pass from the potential Medicaid applicant to their child to whom the home was transferred. This means that when/if the child later sells the home for the fair market value of $150,000 (maybe because the child already has their own home), the child will have to pay gains taxes on the $100,000 profit ($150,000 - $50,000 = $100,000 profit). This tax payment is going to be much higher than the cost of setting up and transferring the home into an irrevocable Medicaid Asset Protection Trust would have been!

IN CONTRAST, this time, let’s say the home was instead transferred into an irrevocable Minnesota Medicaid Asset Protection Trust naming that same child as the beneficiary of the home. In this scenario, when the potential Medicaid applicant later receives Medicaid benefits and then passes away, the home will transfer to the child with what is called a “step-up” in tax basis. Meaning that the tax basis will receive an increase from the original purchase price of $50,000 to the home’s fair market value at the time of the Medicaid applicant’s passing (in this case $150,000).

Therefore, when/if the child later sells the home for the fair market value of $150,000, they will NOT pay gains tax because the tax-basis is now $150,000 – simply because the home was transferred into an irrevocable Medicaid Asset Protection Trust rather than transferred as a straight out gift.

REMINDER: even if transferred into an irrevocable Minnesota Medicaid Asset Protection Trust, the potential Medicaid applicant CAN retain the right to live in, use and enjoy their home for as long as they wish – even for the remainder of their lifetime if they never do need Medicaid’s long-term in-patient healthcare benefits.

This is just one example. But I hope it illustrates that the overall savings from using an irrevocable Minnesota Medicaid Asset Protection Trust can be substantially higher in the end than any amount potentially saved now by transferring assets without using such a Trust.

3) Pre-planning to prevent transfers within the "Medicaid 5-year Look-back Period" which would trigger a "Medicaid Penalty Period" - when/if Medicaid benefits are ever needed in the future.
What is a "Medicaid 5-year Look-back Period"?

As the term implies, the Medicaid 5-year look-back period starts from the date of any Minnesota Medicaid application and "looks-back" 5 years (60 months). ALL transfers and gifts by the person-in-need during that time-period are subject to review by Minnesota Medicaid to determine Medicaid eligibility. Medicaid is looking for “improper” transfers of assets (basically any transfer that may have been made to preserve assets “in contemplation of” applying for Medicaid benefits). The most common improper transfers include:

  • Giving away an asset to someone who is not an exempt recipient;
  • Selling an asset for less than its fair-market value;
  • Adding a person’s name to an asset (for example: adding children as joint owners on a property deed);
  • Purchasing an annuity which is not Medicaid compliant;
  • Paying a child for home care or assistance without a valid personal service contract;
  • Making a loan to a friend or family member with a promissory note that is not Medicaid compliant;
  • Forgiving a loan or debt; or
  • Refusing to take an inheritance that is left through a Will or a Trust.

As part of the Minnesota Medicaid application process, the applicant must be prepared for a full audit of their finances for the previous 5 years. Financial information required for a Minnesota Medicaid application will include:

  • ALL bank statements from ALL accounts with the Medicaid applicant’s name attached for the previous 5 years;
  • ALL tax statements and payments for the previous 5 years;
  • ALL statements for all bills paid over the previous 5 years;
  • ALL receipts for the Medicaid applicant’s expenses for the previous 5 years;
  • Receipts, receipts, receipts... for the previous 5 years; and
  • Statements explaining where all unaccounted-for money or assets during the previous 5 years is/went.

IMPORTANT: any Medicaid applicant must ensure they have ALL the necessary documents BEFORE applying for Medicaid. Not having the proper documents as part of the initial application can result in a lengthy and costly application denial!

Proper preparation of the Medicaid application not only ensures the person-in-need has all the proper documentation needed for the application, it also allows an opportunity to identify any potential problems that need to be addressed BEFORE the application is submitted.

Identifying and correcting any potential problems before the application is submitted is key to the application’s success and reducing – or hopefully eliminating – any potential Medicaid Penalty Period. Attempting to fix a denied Medicaid application will be many times more costly than proper pre-planning would have been - and may even be impossible! For this reason it is highly recommended that you contact an Estate Planning Attorney before any Medicaid application is submitted!

Furthermore, the goal of an irrevocable Minnesota Medicaid Asset Protection Trust is financial pre-planning to ensure ALL of the improper transfer scenarios listed above are avoided. Then, when it comes time to actually apply for Minnesota Medicaid, the person-in-need’s application gets approved the FIRST time.

What is the "Medicaid Penalty Period"?

The Medicaid Penalty Period will apply if a potential Medicaid recipient applies for Minnesota Medicaid, supplies all the necessary financial documentation required for the application, and Medicaid still denies the application due to improper transfers during the Medicaid 5-year look-back period.

If Medicaid determines that improper transfers were made by the Medicaid applicant during the 5-year look-back period, the applicant likely won’t be barred from receiving Minnesota Medicaid forever. Instead, Minnesota Medicaid will calculate and apply a "Medicaid Penalty Period" during which time the applicant will be ineligible for Medicaid assistance. Only after that penalty period has expired can the person-in-need re-apply for Medicaid assistance.

How is the Medicaid Penalty Period Calculated?

Minnesota Medicaid will total up the value of all improper transfers then divide that number by a “Divestment Penalty Divisor” (an amount set by the Minnesota Legislature – typically ends up being slightly below the monthly average rate for nursing home care in Minnesota). Currently, the Divestment Penalty Divisor for Minnesota is $7,106 (effective October 1, 2017).

For example, let’s say Minnesota Medicaid makes a determination that during the Medicaid 5-year look-back period the Medicaid applicant improperly transferred a cabin and a boat, as well as forgave a $15,000 debt, totaling $105,250 in improper transfers. Minnesota Medicaid would then take $105,250 and divide it by $7,106.

105,250/7,106 = 14.8. Therefore, the Medicaid applicant would be ineligible for Medicaid benefits for a period of 14 months and 24 days due to improper asset transfers during the Medicaid 5-year look-back period.

Since the average cost for a semi-private room in Minnesota nursing home currently is $7,361 per month, the Medicaid applicant would have to private pay approximately $108,943 for their long-term in-patient care during the 14 month, 24 day Medicaid Penalty Period.

This is also a good opportunity to point out some think that Medicaid will “go after” a person-in-need’s assets if they can’t pay for nursing home care, but that isn’t the case. Medicaid will simply determine the person-in-need is ineligible for Medicaid benefits.

HOWEVER, during the Medicaid Penalty Period the nursing home bills will still continue to accumulate. Those bills are with the nursing home facility – Medicaid has nothing to do with it. Therefore, it will be the nursing home facility, NOT Medicaid who will seek to recover payment for those outstanding healthcare bills. The nursing home facility will find where the improper transfers went, then take action to recover those assets from whoever received them – even if whoever received them no longer has the cash/assets. We all know nursing home care isn’t free, and so nursing home facilities will do whatever they can to ensure they are compensated for their services.

As you can see, the Medicaid 5-year look-back period and the Medicaid Penalty Period are not the same, but they work hand-in-hand. For anyone who may potentially face long-term in-patient care at any time in the future, pre-planning using an irrevocable Minnesota Medicaid Asset Protection Trust is vitally important. Furthermore, one should consider that such a potential can come from slowly deteriorating health, or a sudden traumatic onset – such as a fall or stroke.

Something else to consider is not only will improper transfers during the Medicaid 5-year look-back period make a Medicaid applicant ineligible for Medicaid benefits for the duration of the Medicaid Penalty Period, such transfers can also put the recipients of those improper transfers in hot water. For example, a long-term healthcare facility looking for payment could potentially seek placing a lien on improperly transferred real estate or they could potentially file a civil court claim against the recipients of other improperly transferred assets!

Don’t let this happen to you or your heirs! REMEMBER: for an irrevocable Medicaid Asset Protection Trust to provide full asset protection, assets must be transferred into the Trust at least 5-years BEFORE the need for long-term in-patient healthcare arises. DON’T DELAY! If you try to wait until the last minute to see if you might not need long-term in-patient healthcare, it will likely already be too late if the need does arrive – and a significant portion, if not all, of your life’s work can be lost to the healthcare facility.

If you think long-term in-patient care may ever be an issue for you, Contact Me today to discuss protecting yourself and your heirs by placing assets into an irrevocable Minnesota Medicaid Asset Protection Trust. You will find that my services are among the most affordable anywhere in Minnesota.

Are there any other benefits of an irrevocable Medicaid Asset Protection Trust?

I've already discussed many benefits of an irrevocable Medicaid Asset Protection Trust, but could there possibly be even more benefits? Absolutely! There are many more additional benefits, including:

  1. Probate avoidance. THE most sought-after benefit of most Trusts! All assets within a Medicaid Asset Protection Trust are exempt from the probate process after the potential Medicaid applicant’s passing.
  2. The potential Medicaid applicant can reserve the right to use any real estate for their lifetime – allowing them to retain full use and enjoyment of the real estate (aka a “life estate”) if they never actually need long-term care.
  3. The potential Medicaid applicant can reserve the right to change or remove Trustees.
  4. The potential Medicaid applicant can reserve the right to change beneficiaries.
  5. Allows property to be sold during the potential Medicaid applicant ’s lifetime without income tax consequences.
  6. If the potential Medicaid applicant is receiving any exemptions from taxes (Homestead, STAR, VA, Senior citizens, etc), they can still use those exemptions even if the premises is in an irrevocable Medicaid Asset Protection Trust.

Looking for even MORE benefits of using an irrevocable Medicaid Asset Protection Trust? (HINT: there ARE more benefits) Then check out my article Top 14 Benefits of Trusts you NEED to know!

What are other important factors one should consider when deciding if an irrevocable Medicaid Asset Protection Trust is right for their Estate Plan?

Lastly, here are some facts to help you be more informed about the topic of long-term healthcare:

  • 1 in 3 Seniors die with Alzheimer’s or other dementia. (alz.org)
  • According to Minnesota Department of Human Services, in 2016 average cost for nursing home care in Minnesota was $7,361 per month (for a semi-private room).
  • The 3 most common ways to pay for your long-term in-patient healthcare are: 1) Long-term Care Insurance; 2) Medicaid; and 3) Private Pay (aka YOUR assets). Which will you use?
  • Medicare is NOT long-term care coverage. At most, Medicare will only cover the first 100 days of long-term in-patient care.
    1. IF you have a Medicare Supplement Plan you will have 100% coverage for the first 100 days of long-term care.
    2. IF you do NOT have a Medicare Supplement Plan, Medicare will only provide 100% coverage for the first 20 days of your long-term care, then you will be required to pay a $160.50 per day co-pay for days 21-100 (that’s $12,840).
    3. REGARDLESS, Medicare long-term care coverage ENDS after day 100.
  • However, as long as you qualify for Medicaid, your ENTIRE cost of medical care, including long-term nursing home costs, can be covered.

DISCLAIMER: I am NOT a tax professional or financial adviser. If you plan on using a Medicaid Asset Protection Trust for tax benefits or purposes, please contact your accountant or financial adviser.

Still have questions? Contact the Maki Law Firm today for your FREE Consultation!

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