Three Medicaid Rules You Can’t Afford to Get Wrong

Losing Everything? Know These Medicaid Rules

Planning for long term care can be incredibly complicated, especially when Medicaid is one of the options. The federal government will pay for the long term care of any senior who needs it, but they have to “go broke” according to specific rules and maximums. However, there can be a lot of specific loopholes that can allow families to keep quite a bit as long as those limits are met and?the way the limits are reached?is within the rules.

Here are three of the most common Medicaid rules explained from a chapter in my book?The Long Term Care Solution?(with some admittedly out-of-date numbers from the time of publishing).

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Sometimes there is just nothing I can do, but it is almost always after the fact. Paul is one of those people who thinks he knows everything, and he was unfortunately finding out that he didn’t know nearly as much about Care Assistance Planning as he should. And now his Mom, well into Alzheimer’s, was going to be caught without money to pay for her care.

In addition to confusing the $14,000 a year gift tax exemption with being exempt for Medicaid purposes, he filled out a Medicaid application for his mother 4 years and ten months after transferring Mom’s house and most of her assets to him and his two sisters. Since he had heard it takes at least two months to get Medicaid approved, he filed the Medicaid application two months before the five-year look-back period expired… and was now told that she would not be eligible for Medicaid for another seven years and three months.

“I don’t understand this!” he shouted. “It’s only supposed to be five years, and she only had two months to go. We’ve been paying for her care out of the money she gave us almost five years ago except for the $14,000 exempt gifts each year. I planned this out to the last penny, and now you’re telling me it’s worse than if I did nothing?”

“Unfortunately, that is the case,” I said. “The five year rule is very strict and often confusing for people who don’t work in the Care Assistance field. The Medicaid office will look back five years from the date of application for gifts, but the period of ineligibility can actually be much longer than that. In this case, the gifts you scheduled out amounted to more than seven years of ineligibility for Medicaid. If you had waited two months to apply, the large gifts from almost five years ago would have been exempt and only the $14,000 gifts would have been counted. That would have cut back on the ineligibility period significantly, but not completely.”

“But I thought those gifts didn’t count!” Paul said.

“They don’t count for Federal Gift Tax purposes, but they very much count for Medicaid purposes,” I said. “It’s a common mistake, but one that Medicaid is not forgiving about.”

“So what am I supposed to do?” Paul asked.

“There are a few options we can pursue, but they all involve going to court,” I said. “Is it possible for you and your sisters to just pay for Mom’s care?”

Paul sunk into the conference room chair and sighed. “My sisters are going to kill me,” he mumbled.

While there are tremendous Care Assistance Planning opportunities to save some assets for the family, it has to be done correctly, and there is a lot of misinformation surrounding some of the Medicaid rules. Here are the three most prevalent but misunderstood rules of Medicaid qualification.

Medicaid Rule One: The “Snapshot” Date

The snapshot date is simply the date that the person entered the nursing home, and therefore is “locked in” to how their assets were arranged at that time. This is one of the reasons why it is so critical to get a good Care Assistance Game Plan in place before someone actually is in the nursing home and facing a giant financial burden. This is particularly true when a couple is involved because it can greatly affect how much assets and income can be diverted to the spouse. Here’s an Example:

Rory needs nursing home care and his wife Amy is trying to rearrange his assets to help. If Rory enters the nursing home on April 1 and Amy starts looking at their assets on April 3, they look like this:

• House worth $500,000
• Rory has IRAs, stocks, and cash worth $100,000
• Rory has an income of $2,000 per month
• Amy has IRAs, stocks, and cash worth $50,000
• Amy has an income of $700 per month

Based on these facts, Amy gets some help with putting together their finances and eventually qualifying Rory for Medicaid. In the end with a good Care Assistance Plan, Amy gets to keep about $75,000, she gets to keep the house with some repairs and upgrades, gets all burial and funeral expenses pre-arranged and paid for, and manages to get an income of $2,500 per month to Amy. The downside is that she had to spend about $20,000 on Rory’s care before Medicaid took over, and Amy does not get to have the maximum “Community Spouse Resource Allowance” of about $110,000.

Now let’s take a look at the same facts but Amy starts planning a few months before Rory actually has to go into a nursing home. By shifting assets around prior to the snapshot date and using a simple revocable living trust on a temporary basis, the full $110,000 can be kept by Amy on the Snapshot Date, still take all of the same other spend down steps, but now Amy and Rory didn’t have to spend down anything on Rory’s care and still get all of the other benefits to Amy. In the end, Amy and Rory came out $55,000 ahead simply by planning two months out.

How is this possible? Why is it this way? It’s because North Carolina and a lot of other states will allow the spouse outside the nursing home, frequently called the “community spouse”, to have UP TO about $110,000 of assets, but it is not done by simply transferring the assets to the community spouse. (In some states, they can). It’s done by taking the whole of the cash assets, dividing by two, and seeing how much the community spouse and the spouse in the nursing home get to keep. Again, a good but simple technique using a simple revocable living trust in conjunction with timing the snapshot date made a world of difference. Or at least a $55,000 difference.

Medicaid Rule Two: The Five-Year Rule

This is probably one of the most misunderstood rules around. The five-year “look back” period refers to how far back Medicaid will look in Care Assistance Planning to see if there were any gifts or transfers that would trigger a period of ineligibility. Let’s take a look at what the Five-Year Rule does mean before showing what it doesn’t mean.

It DOES mean:

• The Medicaid office looks back five years from the date of application to see if there were any gifts made.
• Imposes a period of ineligibility for all collective gifts made within the five years before the date of application.
• The period of ineligibility is the sum of those gifts divided by the cost figure determined by the Medicaid office to be a “monthly average cost” of skilled nursing home care (currently about $6,000) to come out to a number of months of ineligibility. (See below in the rule on gifting for an example).
• The period of ineligibility begins from the date of application.

It DOES NOT mean:

• That the maximum period of ineligibility is five years; it can be much more.
• That a gift of $6,000 a year ago already expired because the ineligibility month started when the gift was made (it used to be that way, but it is not under current law)

The five-year rule can be a little tricky and can profoundly and negatively impact planning. As you saw in the story at the start of this section, not understanding the fine points can lead to much more than five years before Medicaid Care Assistance Planning starts.

Medicaid Rule Three: Gifting

Gifting can be an important and effective technique in Care Assistance Planning, but it has to be done in absolutely the right way. Even more important to understand, gifting within five years of applying for Medicaid Care Assistance is not necessarily a bad thing. In fact, many “crisis” Care Assistance Plans we develop include a lump sum gift with an accompanying ineligibility period, applying for Medicaid to get the period of ineligibility started, and then having the family take over paying for care during that period of ineligibility because the net gain to the family (along with the other spend down techniques) still has the family come out ahead.

Probably the biggest misconception around gifting is something I already mentioned: the annual amount of gifting excluded from gift taxes is not excluded from Medicaid scrutiny. The $13,000 amount most people have heard about (which jumped to $14,000 January 1, 2013) only relates to federal gift taxes. It has nothing to do with Medicaid. Another piece of that same misconception is that if the gifts are spread out among a lot of different relatives, then the implications are diluted. Again, this relates to the federal gift tax in that you can give $100,000 as 10 gifts of $10,000 each and it is not gift taxable, but there would be gift tax implications if you just gave one $100,000 gift to a person. As far as Medicaid is concerned, there is no difference since it counts up the total gifts given within the last five years regardless of the recipient or recipients (excepting spouses).

Care Assistance Planning can have a huge impact on the family and a spouse staying out of the facility. Unfortunately, doing Care Assistance Planning the wrong way can also have a huge impact on the family if done incorrectly and not for the better.