When protecting your family’s assets against the devastation of long-term care, there are many types of special income trusts that can help.
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Common misconception is that Medicaid is only for seniors and those with low incomes. With a little planning and estate planning, anyone can qualify for benefits.
The Medicare program was established by Congress in 1965 to increase insurance coverage and provide financial stability for seniors, regardless of their income, health status, or past medical history. They also outlined the parameters for Medicaid, a state-managed program that is means-based and provides additional coverage for low-income, disabled, and their families.
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Medicaid, unlike Medicare, is not administered by the federal government. Each state determines its Medicaid eligibility criteria and eligible coverage groups. They also decide the payment level and administrative procedures.
The Medicaid program is unique in that it covers long-term nursing home costs as well as many home health care expenses. This is not covered by Medicare. Imagine working hard and saving over a lifetime only to have your wealth rapidly wiped out by long-term care costs — assets that could otherwise provide a lasting legacy for your family.
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Strategies to meet income needs
Medicaid is a prized benefit that provides coverage for long-term nursing and many other home health services, despite its high cost. The current income limit for Medicaid waivers is $2,382/month (28,584/year) per person in most states.
Two trusts are commonly used to divert income if your income is higher than the Medicaid eligibility threshold in your state.
Qualified Income Trusts, also known as “Miller trusts”, are an irrevocable trust in which your income is deposited. The trustee you choose will then control it. The income from the trust is subject to strict restrictions. This includes a personal “needs allowance” and, if applicable, a spouse’s “needs allowance.” It also prohibits the use of the income for any medical costs or private insurance premiums. The funds are legal assets of the trust and not you, so they do not count against your Medicaid income eligibility.
Pooled income trusts: These trusts are similar to QITs and allow you to divert your surplus income to keep your eligibility for Medicaid. To be eligible for a pooled trust income, you must be disabled. Your income is combined with that of others and the trust is managed by a charitable non-profit organization. The trustee makes monthly payments to cover expenses for the beneficiaries. The trust’s remaining funds are used to aid other disabled people.
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These income trusts were created to provide a legal route to Medicaid eligibility for people with too little income to be eligible for Medicaid, but not enough to cover the rising costs of care.
Strategies to meet asset needs
The Medicaid “asset test”, like income limits, is complex and varies from one state to the next. Your home’s maximum value is generally exempt, as long as you live there or plan to return. To qualify, however, you will need to reduce your other assets by $2,000 per person ($4,000 for a married couple).
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You can choose to transfer your assets to family members. This poses a risk of losing your assets if the person is divorced or goes bankrupt/lawsuit. You rely on the individual to be trustworthy and financially responsible. It’s not as easy as it sounds considering the five-year Medicaid look-back period (more details in a moment).
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Asset Protection Trusts: If properly created, you can transfer all or most of your assets to a trust that will remove those assets from your estate. These asset protection structures are often referred to “Medicaid Trusts” and can help you qualify for Medicaid benefits. They also protect your assets from potential creditors. You can still choose to receive income from income-generating assets such as stocks or bonds if they are in the trust. You can transfer your home to the trust, and you will be able to continue living in it throughout your life. Your beneficiaries will receive the assets upon your death according to the trust documents. Beneficiaries will also enjoy a “step-up” in basis for any trust assets they receive, avoiding capital gains from the increase in your value.
Planning well in advance is important
It is never too late for you to start creating a plan for your health care. Like all planning, the longer you plan, the more flexible you will be and the simpler it will be. Medicare uses a 5-year look-back period to examine applicants’ finances.
The disallowance of transfers of assets that were made within five years before you need home care, nursing home or assisted living facilities may apply to certain assets. For Medicaid purposes, these assets will still be considered to be yours and you’ll need to spend them down before being eligible for coverage. Transfers to trusts, just like individuals transfers, are subject to the same look-back period.
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Remember that Medicaid does not allow you to choose where you get care. Only Medicaid-approved facilities can accept you. Your ability to stay in your home while receiving care decreases as many states limit the coverage of their Medicaid programs for home health care. It’s a smart idea to meet with your financial advisor to discuss your long-term care options.
