Monthly Archives: May 2020

Medicaid is a partnership between the state and federal governments to provide medical benefit assistance to people, including those over age 65, who have financial need.

In order to be considered to have financial need, when you go into a nursing home and go on Medicaid, you cannot have more than $2,000 (in most states) in “available” resources. Some resources don’t count, such as the car used for your medical transportation. Also, assets that cannot be used for your benefit, such as in an irrevocable trust, typically don’t count either.

A prior post set forth the reasons giving assets to an irrevocable trust is a better strategy than giving outright. But, it’s important to keep in mind that uncompensated transfers, whether outright or to an irrevocable trust, can generate a penalty period. This article will examine when there’s a penalty and how it works.

If you give away assets during the “lookback period” there’s a penalty period. The lookback period typically is five years (60 months) from the date on which you apply for Medicaid and are “otherwise eligible.” Otherwise eligible means that you have a medical need and are financially eligible. So, let’s look at an example: Mary is medically in need of going into a nursing home. She only has $2,000 in available resources, such as her checking account. In other words, she’s “otherwise eligible” and is applying for Medicaid. When Mary applies for Medicaid, they’re going to ask her about any uncompensated transfers she made within the “lookback period,” which in almost every state is 5 years. If Mary didn’t have any uncompensated transfers to report, she’d be good to go.

But, what if Mary had made an uncompensated transfer during the lookback period? In that case, Medicaid wouldn’t kick in until the penalty period passes. The penalty period is the amount of the uncompensated transfers in the lookback period, divided by the Average Private Pay Rate (“APPR”) for her area (typically the state but sometimes the county or local area). Mary had made $150,000 in uncompensated transfers in the lookback period. The APPR in her area is $10,000. So, she has a 15-month penalty period.

So, once Mary is otherwise eligible and applies for Medicaid, she’ll have a 15-month period during which Medicaid won’t pay for her care. She’d have to pay for her own care during that period. But how can she do that if she only has $2,000 in available resources? Typically, she’d use exempt resources such as her home equity or she’d have her family pay for her care during that time. If she didn’t have family willing to pay or any exempt resources, she could find herself in a real bind.

That is the reason it’s important to do gifting early so that you maximize the chances of having it done outside of the lookback period. None of us know when we might need medical assistance. Therefore, it’s best to start your Medicaid planning as early as possible.

Gifting, including to a Medicaid trust, can be a great tool to allow you to protect some assets and still qualify for Medicaid. 

Medicaid is a partnership between the state and federal governments to provide medical benefit assistance to people, including those over age 65, who have financial need.

In order to be considered to have financial need, when you go into a nursing home and go on Medicaid, you cannot have more than $2,000 (in most states) in “available” resources. Some resources don’t count, such as the car used for your medical transportation. Also, assets that cannot be used for your benefit, such as in an irrevocable trust, don’t count either.

If you give assets away, this may generate a penalty period which I will explain in the next post, but is generally five (5) years. As long as these assets are no longer available for your use, they aren’t considered your resources. So, you could give your assets to your adult children. However, there may be many reasons not to do that. Your child could:

• Be a minor or otherwise lack capacity,
• Get divorced and lose the assets in the divorce settlement,
• Get sued due to a car accident or other event,
• Lose the assets through poor investments, gambling, etc.

But, there is a better way. You could give the assets to an irrevocable trust. The trust principal would not be for your benefit, otherwise, it would be an available resource. The trustee of this trust would invest those assets. You could retain a right to the income from the trust (in the vast majority of states). The trustee could distribute to someone else, like one of your children, in the trustee’s discretion. After your death, the assets would be divided as you had outlined in the trust.

Let’s look at an example: Mary had $400,000 over the asset limit in her state. She transferred it to an Irrevocable Medicaid Trust. John was her trustee. Mary retained the right to the income of the assets during her lifetime. John, as trustee, could make distributions to Mary’s daughter, Betty, during Mary’s life. At Mary’s death, the assets in the trust would be split between Mary’s daughter, Betty, and Mary’s son, Alex. If Mary needs some of the principal, John could make a distribution to Betty. Betty could use the money distributed to her for Mary’s benefit if Betty wanted to do so but would be under no obligation to do so.

If you wanted to provide the most protection, the trustee shouldn’t be Mary or Betty. If Mary were the trustee, some states would consider the trust assets to be “available” to her. Therefore, unless you’ve checked with your state’s Medicaid-administering agency and they have determined it’s ok for the Trustor to be the trustee of the Medicaid trust, it’s best not to do so. In Illinois, a beneficiary can be the trustee.  If Betty were the trustee and could distribute to herself, it would allow Betty to take all the assets out of the trust for her own benefit and thus, would allow her creditors to do the same thing.

A Medicaid trust can be a great tool to allow you to protect some assets and still qualify for Medicaid. But, each state is different, so call me to discuss.

Bob

The novel “coronavirus” (also called “SARS-CoV-2”) causes the disease “COVID-19.” It first appeared in late 2019 and was reported to the World Health Organization (WHO) on December 31, 2019.  COVID-19 has impacted the lives of millions of people and countless events around the world.

The coronavirus has caused an unprecedentedly steep increase in unemployment and has roiled stock markets around the world. The resulting low-interest rates open the door to unique estate planning opportunities.

The IRS sets the “Applicable Federal Rate” or “AFR,” which is the rate the Service determines is the going interest rate. As long as you charge at least that rate, you will not be deemed to have made a gift in charging the interest rate. The AFR is set in the middle of the month for the next month. The AFR for May 2020 is historically low. Those rates are .25% for a loan of up to 3 years, .58% for a loan term of 3 to 9 years, and 1.15% for a loan over 9 years duration. The rate for certain estate planning transactions, such as life estate and remainder interests, is .8%.

One common way to help loved ones without using any lifetime exclusion is by lending money at a very low-interest rate. If you charge no interest, then (with an exception for small loans between individuals), the Service will deem that the borrower paid interest to the lender and the lender gave it back to the borrower. This would cause taxable income to the lender and a taxable gift by the lender. (In a future article I’ll examine these so-called “gift loans” under Section 7872.) A loan at the AFR faces no such imputation of income or a gift.

Let’s look at an example: John lost his job due to the coronavirus pandemic. He had a good job at a major retailer that had to close due to stay-at-home restrictions. As a result, John is considering moving his family closer to his mother, Mary, as she’s getting older and needs more help as she ages. Mary has excess funds and decides she wants to benefit John. She wants him to have a good start and wants to make it easier for him and his family to move closer to her. She doesn’t want to use any of her gift tax exclusion as she has other uses for it. She lends John the money for his house, charging interest at the AFR, 1.15% for a 30-year loan (in the month she lends the money). She also lends John money to start a new business. This helps John immensely. He doesn’t have a job and will be moving to a new city. He would have had difficulty qualifying for a loan. Even if he could have gotten a loan, it would have been at a much higher interest rate.

Mary was able to provide a real benefit to John. This helped make it possible for John (and her grandchildren) to move closer to her. It allowed John to save money on his mortgage and business loan. It allowed Mary to help John without using any of her exclusion. It also allowed her to slow the increase in the size of her taxable estate.

This transaction worked to benefit both Mary and John. It allowed John and his family to move closer to Mary and for them to become even closer, both geographically and personally.

Bob