A recent National Public Radio (“NPR”) article discussed one family’s experience with the Medicaid estate recovery program, something many elderly Americans and their families face. When the matriarch of the family received a diagnosis of Lewy body dementia, a case manager from the Area Agency on Aging suggested that the family explore the state’s “Elderly Waiver” program to help pay expenses not otherwise covered by Medicare or the family’s health insurance. The family completed the necessary paperwork without understanding that the program was a branch of Medicaid because the forms indicated that the program was designed to help “keep people at home and not in a nursing home.” Imagine the family’s shock when they received a letter shortly after the matriarch’s death that the state would seek reimbursement for the funds spent on her care. At first, the family thought it was fake, but they soon found out that it was real and that the agency was seeking reimbursement as required by federal law. Some of the funds that the family received were paid to the daughter as income for her mother’s care. She paid income taxes on those funds and now needs to help her dad figure out how to pay them back. Their biggest asset, the family home, is worth approximately one-third of the total amount sought for recovery. Of course, the agency can only recover half the total value of the home because the decedent owned it jointly with her surviving spouse. Further, the agency cannot seek reimbursement for any of the funds it expended until after the surviving spouse’s death. This scenario resonates deeply with many families.
Most folks understand that Medicaid is a partnership between the federal government and each individual state designed to provide medical benefit assistance to those over the age of 65 who have a financial need. The program defines financial need as income and assets below a certain amount. Most states require the Medicaid applicant to have an income of no more than $2,742/month. Thankfully, states impose no such limitation on the spouse of the applicant, thus the non-applicant spouse could have $15,000 in income without disqualifying their applicant spouse. Further, if the well or “community” spouse does not have enough in their own income, then a portion of the applicant spouse’s income may be allocated to the community spouse. This protection, called the Minimum Monthly Maintenance Needs Allowance (“MMMNA”), helps shield the well spouse from impoverishment. In most states, the maximum amount of income that can be allocated from the Medicaid applicant spouse to the well spouse is $3,715.50/month. Note that the income of the non-applicant spouse when combined with the spousal income allowance cannot exceed that amount.
Determining whether an applicant meets the asset test requires more analysis. First, states divide assets into countable assets and exempt assets. Exempt assets usually include things like the home, household furnishings, retirement accounts, life insurance, and the car used for medical transport. Available resources mean everything else. Second, if the applicant is married, then all assets, regardless of whose name the assets are held, count for purposes of determining eligibility for Medicaid. Generally, an individual needs to have less than $2,000 in “available” resources. Like under the income requirements, the non-applicant spouse has additional protection called the Community Spouse Resource Allowance (“CSRA”). Each state determines which assets will count as “available” within federal guidelines and which assets to exclude as well as the amount of the CSRA. The federal government sets the minimum ($29,724) and maximum ($148,620) amount and states (Illinois is $123,600.00 for a married couple) decide which number in that range they want to use. If the assets cannot be used for an applicant’s benefit, such as assets in an irrevocable trust, then those assets generally don’t count as an available resource.
There are several ways that an individual may lower their countable assets. Many people seeking to avail themselves of Medicaid assistance establish irrevocable trusts to hold their assets to keep those assets from being counted. The trust principal cannot benefit the Grantor, if it does, then it’s considered an available resource. The trustee of the trust invests the principal. Sometimes the Grantor retains the right to income generated from the trust, but the Trustee has discretion to distribute the principal to other individuals, such as the Grantor’s children. Upon the Grantor’s death, the trust agreement dictates the division and distribution of the assets in the trust. A Medicaid trust is by no means the answer to every problem, but it’s a great solution for many families. Some families fail to consider undertaking this planning until it’s too late. If they create a trust too close in time to when they apply for Medicaid, then they will be subject to a “penalty period” during which time they will need to cover their medical expenses.
Qualifying for Medicaid alone does not end a family’s concerns. Once they have an individual qualified, they need to worry about repayment. The federal government requires each state to seek recovery of funds spent through the Medicaid Estate Recovery Program (“MERP” or “MER”). Each state must seek repayment from the decedent’s probate estate, but the state has the option to attempt recovery from assets outside the probate estate as well. As part of the recovery process, Medicaid can place a lien on the Medicaid recipient’s home in some states and some circumstances. A qualified Estate Planning attorney can help a family work through what assets will be subject to reimbursement and how to plan for it.
Medicaid planning requires an understanding of the concepts explained above as well as Estate Planning generally. Due to a five-year lookback on uncompensated transfers, setting up a Medicaid trust far in advance of needing the care is a great way to give you and your family peace of mind.