4 common misconceptions about Medicaid

In order for an individual to qualify for Medicaid, the applicant must own assets below a certain dollar value. One of the most common and problematic misconceptions about Medicaid for married couples is that a person's individually owned assets are separate and not included in the evaluation of a spouse's application for Medicaid.

When a spouse applies for Medicaid, all assets owned by either spouse are considered jointly owned. This includes whether these assets are from a first or second marriage, protected by a prenuptial agreement or even an inheritance received by the spouse not applying for Medicaid. Whether the assets are liquid (bank accounts, for example) or non-liquid, such as a home, both spouses' assets are considered when determining an individual's eligibility for Medicaid.

However, it does not mean that an individual must spend down all of their assets so that their spouse can qualify for Medicaid. There are exceptions to protect spouses of Medicaid recipients to ensure they do not become impoverished for the sake of their spouse's Medicaid eligibility. To better understand these Medicaid exceptions, it's important to understand a couple of basic Medicaid terms.

For Medicaid purposes, there is what's known as the community spouse and the institutionalized spouse. The institutionalized spouse is the individual applying for long-term care through Medicaid. The community spouse is the one not applying for Medicaid. To qualify as a community spouse, you must be living in a personal home, assisted living facility or with a relative.

Community spouses get relief from the Medicaid eligibility rules through the program's Spousal Impoverishment Standards. These standards allow the community spouse to keep a portion of their assets while not impacting the eligibility of their spouse.

While it varies from state to state, a community spouse is provided what they call a community resource allowance. When determining Medicaid eligibility, any resources that fall within your state's maximum community resource allowance will be deducted from the joint assets for Medicaid eligibility purposes.

In addition, community spouses are also allowed to keep a certain amount of their income, and their spouse's income, under the minimum monthly maintenance needs allowance. These are the two primary protections Medicaid has in place for community spouses both when their spouse is applying for Medicaid and while their spouse is receiving Medicaid benefits.

Despite the exceptions in the Medicaid rules, an individual may find themselves with assets that exceed these limits. In an ideal situation, an individual will have engaged in estate planning to protect these assets long before Medicaid was necessary. However, when Medicaid is needed prior to any estate planning, one's options become more limited. Here are a few options for spending down your assets:

• Pay existing bills, including paying down bills in advance of when they are due.
• Make home improvements or modifications, such as those that may be needed for the long-term care of their spouse.
• Purchase an annuity that can be used as a means to provide the community spouse a stable monthly income.

Another common misconception is that Medicaid is not necessary because Medicare will take care of paying for long-term care in a nursing home. While Medicare may pay for some nursing home expenses, it's not as expansive as some believe and comes with certain conditions and limitations.

Generally, yes, Medicare can cover a nursing home stay, but it is subject to significant limitations. The first limitation is that Medicare will only cover a nursing home stay if you were first formally admitted as an inpatient at a hospital for at least three consecutive stays.

Understand that being admitted is different than being in a hospital for observation purposes, which will not qualify you for Medicare coverage for a subsequent nursing home stay, regardless of the length of your hospital stay. Second, the nursing home care will only be covered under Medicare if your admission into the nursing home facility is for the same reason you were admitted into the hospital, and it was within 30 days of your hospital stay.

Your doctor will have to certify that the nursing home stay is related to your hospital stay and that it is a necessary part of your care. If you meet these requirements, Medicare can cover nursing home expenses such as your room, meals, nursing care and occupational therapy. Individuals are subject to continual evaluation, and if it is determined that ongoing skilled care is no longer needed, Medicare will stop making payments for one's nursing home expenses.

Even if one qualifies to have Medicare pay for their nursing home stay, it is not for an unlimited period of time. Medicare will only cover these costs for the first 100 days. Beyond that, Medicare will no longer cover any related expenses. Also, during those 100 stays, the individual is obligated to cover a portion of those costs.

For the first 20 days, Medicare will cover 100% of the costs. For the remaining days, as of 2022, the admitted individual is responsible for paying a $194.50 daily copay.

When Medicare stops paying for one's nursing home expenses, they have some options. First, they can use their savings to pay for long-term care. This is not ideal unless one is independently wealthy. Long-term care is very expensive, and for the overwhelming majority of people this is not even an option.

Furthermore, regardless of your income and resources, there are better ways to plan for one's long-term care that do not involve paying 100% out-of-pocket. A second option is long-term care insurance, which can be expensive and difficult to obtain, however.

Sometimes people confuse exemptions under the federal estate and gift tax with Medicaid exceptions. While it's true that an individual can give away up to $16,000 per year to multiple individuals without incurring a gift tax, this has nothing to do with Medicaid eligibility.

For most people, the federal and estate gift tax is not something to be concerned about. As of 2022, individuals are provided a $12.06 million lifetime exemption to the federal estate and gift tax. Medicaid eligibility on the other hand is a challenge that one is far more likely to have to encounter, so it's important to make a clear distinction between these two sets of rules.

The reality is that gifts given within Medicaid's look-back period may be exempt from federal and estate gift tax, but they are still subject to a penalty period for Medicaid eligibility purposes. Any gifts that are made within five years of applying for Medicaid will be subject to this look-back period.

Under the Deficit Reduction Act of 2005, gifts given during the look-back period will result in a period of ineligibility for Medicaid long-term care benefits. There are limited exceptions to the look-back period such as the creation of a special needs trust, but for the most part, almost all gifts are subject to the five-year Medicaid look-back period.

Let's look at a brief example to highlight how this misconception can have a costly impact on one's Medicaid eligibility.

An individual living in Pennsylvania is coming close to the time when they think they will need to apply for Medicaid in a state where the average cost of long-term care is around $482.50 per day. This individual knows that they can give a gift of $16,000 a year annually to as many people as they want and not be subject to any federal and estate tax as long as the lifetime gifts do not exceed $12.06 million.

Unfortunately, they also believe that this exception applies to their Medicaid eligibility as well. So, over the past five years they have given various monetary gifts to their family and friends for a total of $240,000.

When they go to apply for Medicaid, they find out that those transfers are subject to a five-year look-back period and that a penalty will be assessed based on the total of those transfers ($240,000) divided by a penalty divisor (the average cost of long-term care in the state). As a result, the individual is unexpectedly assessed a 497-day ineligibility penalty. This is quite the penalty for confusing federal and estate tax exemptions with Medicaid eligibility exemptions.

Estate, Medicaid and tax laws are all complicated. With the myriad of laws and exemptions, it is easy to confuse exceptions to tax laws with exceptions to Medicaid eligibility. This is yet another reason why it is important to consult an experienced estate planning attorney so they can help you better understand the complexities of these various areas of law as they often overlap with each other.

The final major misconception about Medicaid is that in order to be eligible for Medicaid, you must sell your house and everything else you own. Part of this misconception is because, on its face, the limit for the amount of assets one can own to qualify for Medicaid is quite low. However, the Medicaid rules provide exemptions for certain property. If property is considered exempt, Medicaid will not include it as part of your assets for eligibility purposes.

So, what assets are exempt for determining Medicaid eligibility? An individual's primary vehicle is considered an exempt asset. However, the biggest exemption is typically one's primary home if either the applicant or their spouse currently lives in it.

In some states, even if a spouse is not living in the home, an applicant's intent to return home is enough to qualify the home as an exempt item. This, however, is a little more complicated and will depend on the state and the individual's particular situation. Some states require that the applicant is likely to return home and disregards the intent of the applicant.

While Medicaid may exempt certain property when applying, it does not mean the property is untouchable forever. When a Medicaid recipient dies, their estate could be subject to Medicaid estate recovery.

Medicaid estate recovery is a federally authorized system that states use to recover assets to pay for the medical services that were initially paid for through Medicaid. Through Medicaid estate recovery, a state will be considered a creditor of the estate. Any assets that go through the probate process would be required to pay for Medicaid services before being distributed to any heirs.

When it comes to one's house, Medicaid estate recovery can even extend to a house left in one's estate. While there are certain exceptions for hardship cases or when certain family members live in the house, there are better ways to ensure your house is protected after you pass away.

Placing a home in a life estate or irrevocable trust are among ways to protect this asset from Medicaid estate recovery. These estate planning tools can transfer property to your heirs outside of probate and in a way in which the state will have no claim on the property.

Using these tools may not only protect your assets from Medicaid estate recovery, if timed right, they can also ensure that you meet the qualifications for Medicaid eligibility when the time comes. Finally, certain estate planning tools can even ensure you are provided significant rights in the property while you are alive, so you are not forced to have to sacrifice control of the property for the long-term protection of your assets.

Medicaid is often a necessity, and so it's important to understand exactly what it does and does not do. Understanding Medicaid is half the battle. Knowing how the Medicaid system works can help you best plan for the future and the future of your estate.

The best thing you can do is discuss your estate and Medicaid concerns with an experienced estate planning attorney. They can guide you through the best ways to ensure you are eligible for Medicaid while protecting your assets for your loved ones and generations to come.