Many folks believe that creating a trust as the centerpiece of their estate planning is all that needs to be done to protect their assets for future generations. (I cannot tell you how many times I have heard someone say “my house is in a trust, so I am fine.”) While a revocable living trust—the most common type of trust used in estate planning—can sidestep the probate process, it does not shield your assets from being used to pay for end-of-life care rather than going to the people and organizations of your choice.
Read on for some basic tips about making sure your assets are preserved for your loved ones!
Medicare vs. Medicaid
Before we highlight asset protection strategies, it is important to distinguish between Medicare and Medicaid.
Medicare
Medicare is basic health insurance available to folks in the United States who have reached age 65 and meet certain other requirements. You can choose to obtain Medicare coverage under Original Medicare (Parts A and B) or Medicare Advantage (Part C). Some folks also obtain Medicare drug coverage (Part D) or a Medicare Supplemental Insurance plan (Medigap) to help with non-covered costs.
Medicare Part A is hospital insurance, and Medicare Part B is medical insurance. Under these plans, Medicare typically covers 80% of your medical expenses. You can use any doctor or hospital in the United States that accepts Medicare insurance.
Medicare Part A includes coverage for short-term nursing home care. It does not cover custodial or long-term care.
Original Medicare does not include coverage for vision, hearing, and dental services.
With Medicare Advantage, you enroll in a Medicare-approved plan from a private company that bundles parts A, B, and often D. Plans may have lower out-of-pocket costs, and often include vision, hearing, and dental coverage, but you typically will need to use doctors and hospitals in the plan’s network.
Medicaid
Medicaid is a federal program administered at the state level that provides health coverage for residents of limited means. Unlike Medicare, you do not need to be age 65 to qualify for coverage. The Children’s Health Insurance Program, or CHIP, can provide coverage to children even if their parents do not qualify.
Specific eligibility requirements vary by state and are based on household income, family size, age, and other factors. The most important factor in long-term planning is the asset test. Simply put, if you have too many assets, you will be ineligible for coverage. As a result, many folks assume they will never qualify for Medicaid. With careful planning, though, you might one day be able to utilize this program.
Why should I care about qualifying for Medicaid?
Exploring potential Medicaid eligibility is important because Medicaid covers the cost of many services that Medicare does not. Chief among these is long-term nursing home care (i.e., a skilled nursing facility). With the cost of long-term care insurance prohibitive for many folks, Medicaid might be the only way to pay for end-of-life nursing home care.
Trying to predict the length of stay in a nursing home is near impossible. Research has shown that while most nursing home stays are brief, average lengths of stay are greater than a year (which is explained by a small percentage of residents with very long stays). While costs vary by state, the average cost of nursing home care is approximately $9,000 per month (or more than $108,000 per year) for a private room.
If you are risk-averse, you might set aside funds to cover two or three years in a nursing home. But if you only need three months, you have missed out on the joy you could experience putting those other funds to use during your lifetime. On the other hand, you might plan for an “average” stay of perhaps 15 months, and then end up being there for 2.5 years. After your personal funds dry up, you will still need Medicaid to step in to cover the remaining costs.
Medicaid Asset Test Defined
Each state has its own asset test for Medicaid eligibility. This is the maximum amount of assets you may own and still qualify for coverage. The threshold is disgustingly (in my opinion) low across the board. Each state also has its own list of exempt assets, meaning those specified assets do not count against you for purposes of the asset test. Chief among these is generally your main home—i.e., the one you actually occupy.
Some states exempt the value of your main home entirely, while others provide an exemption only up to a certain amount.
Medicaid Asset Recapture
A person’s main home is often their most valuable asset. Since it is “exempt” under the asset test, many folks make the mistake of assuming that they will be able to keep their home and then pass it down to their heirs. Not so.
Medicaid has an asset recapture provision that allows your state to seek reimbursement for costs expended on your behalf from your estate after your death. For example, assume you incur $150,000 in nursing home and other medical costs that are covered by Medicaid. After you die, that $150,000 is a debt that your estate must satisfy out of its available assets, if any. Your main home was exempt from the asset test when considering your Medicaid eligibility, but now it counts as available to satisfy the accrued Medicaid debt. If your home was only worth $75,000, the entire value goes to Medicaid. On the other hand, if your home was worth $280,000, it would need to be sold to repay Medicaid if there were no other assets, but at least the remaining $130,000 would still be available to your heirs.
If your estate has no other assets, asset recapture does not matter. Your family and other heirs are not responsible for this debt (or any others you may leave behind).
Protecting Your Assets From Recapture
With proper advance planning, you can avoid this scenario.
In short, get rid of your assets well before you need Medicaid. Gifting assets at death (rather than during your lifetime) is generally better tax-wise for the recipient, but gifting a reduced value now is better than gifting no value later if your assets must be used after your death to satisfy a Medicaid debt.
You can accomplish this in one of two ways, or some combination of the two. First, you can gift property outright. If you know you want your home to eventually wind up with your grandchildren, for instance, you can deed the property to them now.
A transfer-on-death deed, which is available in an increasing number of states, is insufficient for asset protection. While it avoids probate in the same way that a pay-on-death beneficiary designation does for bank and brokerage accounts, you still own the property during your lifetime, so it is subject to recapture. You must actually give the home to your chosen beneficiary while alive under the gifting approach.
Second, you can transfer assets to an irrevocable trust. This is different from the revocable living trust typically used for estate planning where you continue to effectively own the assets. An irrevocable trust, which is more complicated, must be managed by someone else and be truly irrevocable. Once you transfer assets into the trust, you no longer have control or ownership over them. A provision that gives you continuing influence or control will result in you being deemed the owner of the assets, which defeats the purpose in setting up this type of trust.
The key in both approaches is that you lose legal control over the assets. They are no longer yours.
Other Points to Consider
There are a few additional points to consider when designing an asset protection plan.
First, a gift or an irrevocable trust can be designed so that you still have a legal right to live in your home while you are still alive. Practically speaking, this extra step is not necessary if you trust the person to whom you gift the home or serve as trustee of the irrevocable trust.
Next, be aware that significant gifts, including transfers to irrevocable trusts (which count as gifts to the trust beneficiaries), will likely involve gift tax implications. That sounds scarier than the reality. In 2023, individuals have a lifetime combined gift and estate tax exemption of $12.92 million. You can gift up to $12.92 million total during your lifetime and at death without incurring gift tax; you only incur gift (or estate) tax once your combined gifts exceed this amount. If you gift your $5 million home today, and that is your first gift that counts against the combined exemption, you will need to file a gift tax return to report the transaction, but will not owe any tax. (I will prepare and file your gift tax return at no cost if you want to gift me your $5 million home. 🙂)
Many gifts do not count toward your lifetime combined exemption, such as gifts to your spouse, charitable organizations, medical or education expenses paid directly, or gifts below the annual exemption amount (currently $17,000 per recipient from each donor). Be strategic with your gifting.
If you plan to support certain charitable organizations, you can gift them appreciated securities—i.e., stocks, bonds, and mutual funds—and obtain a tax deduction now at their appreciated values without incurring capital-gains tax.
Finally, Medicaid has a five-year lookback rule. When you apply for Medicaid, any assets that you transferred within the previous five years will count against you for eligibility purposes. The sooner you shed assets, whether by gift or otherwise, the sooner the five-year clock starts. If you might want to be eligible for Medicaid in five years, you should gift your home or other large assets soon.
Conclusion
If you eventually need long-term nursing home care—which is the case for most aging adults in the United States—your assets will be used to pay those costs until they are dissipated, at which point Medicaid can pick up the tab. But with proper advance planning, you can take control of the timing and still preserve your assets for your loved ones.
Ultimately, you need to figure out what is most important to you regarding your assets after you die. If making sure your heirs can make use of them (by selling or continued ownership) after your death, then the best course of action is to transfer them well in advance of when you might need Medicaid. If you are less concerned about what happens after death, and want to maintain ownership in your own name while you are still alive, then a simple probate-avoidance device is your best bet.
The “right” approach is the one that works best for you. Every situation is unique; this discussion is obviously painted with a wide brush and is not tailored in any way. Reach out to me for assistance to craft an individualized approach that meets your goals.
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