If you have more than a small amount of assets, you may have to take special steps to qualify for Medicaid. Without the proper planning, by the time you apply for Medicaid, you'll likely be ineligible to receive its benefits or may have to get rid of a lot of what you own to qualify. For many people, this is an unsettling proposition because it requires them to get rid of something they've spent their whole lives protecting, saving and developing.
A great example of this issue comes with a family business, such as a limited liability company (LLC). Perhaps it's a corner shop that's been in the family for generations. It could be a modestly successful business that produces “enough money to do something, but not enough to do nothing.” Regardless, you assume Medicaid doesn't care and expects you to either forego Medicaid benefits or sell the business and use the proceeds to pay for your medical needs.
Is this assumption correct? Or could your family business be a Medicaid-exempt asset? To answer these and related questions, let's step back a bit and explain what Medicaid is and why it exists.
What is Medicaid?
Medicaid is a joint health care program that's typically run and administered by states, with much of the funding coming from the federal government. Because it's the federal government that financially supports much of Medicaid, it sets out basic rules on how states should run their Medicaid programs.
There are other state and federal programs that help people pay for their medical expenses. But Medicaid stands out in that the benefits it offers includes financial assistance to pay for long-term care, such as care at a nursing home or assisted living facility. However, to obtain these benefits, individuals must meet the financial-need requirements.
Financial eligibility requirements for Medicaid
Generally speaking, applicants will qualify for Medicaid if they can show that they fall below the income and property thresholds. These exact thresholds depend on each state's laws and how it decides to operate the program. These limits usually fall around $2,000 in countable assets (for an individual) and $1,000 to $1,500 per month in individual income. A key term here is “countable asset,” as there are several major types of property that don't get counted for Medicaid determination.
Medicaid-Exempt assets are types of property that are not counted when determining financial eligibility for Medicaid. Common examples of Medicaid-exempt assets include:
- Personal property from the home, like clothing and furniture
- A motor vehicle
- A primary residence
- Certain pre-paid funeral and burial plans or contracts
- Some whole life insurance policies
One thing to keep in mind about these Medicaid-exempt assets is that most states will differ in the limits or caps on their values. A good example of this is with the personal residence, and states can differ in the exemption cap by several hundred thousand dollars.
Medicaid-Exempt assets can also include property that is being used for a business or trade, such as a family business limited liability company (LLC).
What is an LLC?
A limited liability company is a business form that, for the most part, protects the owners of the LLC from being personally liable for the LLC's debts or legal liabilities. This is similar to a corporation, but there are some major differences, such as how income from the LLC is handled from a tax perspective and the business formalities necessary to create an LLC.
LLCs are regulated at the state level and therefore, their creation, regulation and how they work with respect to Medicaid eligibility will be state-dependent. It's no surprise that there are a lot of small- or medium-sized businesses that make use of the LLC business structure. This means a lot of potential Medicaid beneficiaries will have LLCs they want to keep when they apply for Medicaid.
What happens to my LLC if I apply for Medicaid?
The answer to this question depends on if the LLC is considered a countable asset or not. As a rule of thumb, as long as the property in the LLC is being used for a business or trade, the property in the LLC may be considered a Medicaid-exempt asset.
So let's say your LLC is a flower shop and its property includes the physical flower shop store, two delivery vehicles and various tools, coolers and other pieces of equipment. There's also a small inventory of bouquet supplies and a business bank account with a balance of $8,000. All of this property that's part of the LLC will not be a countable asset when you apply for Medicaid.
That's it? Is it true that you can easily preserve your business for your family while also being eligible for long-term care Medicaid benefits? Well, not so fast, because there are several key issues to understand.
First, the property in your LLC might be considered to be a Medicaid-exempt asset, but the income it produces is not. If your flower shop were to bring in several thousand dollars in net income each month, then there's a decent chance that you'd still be ineligible for Medicaid even if you met the minimum asset threshold. Put another way, the income producing property may be a Medicaid-exempt asset, but the income itself may not be.
Second, even if the property in the LLC could be considered a Medicaid-exempt asset, it could be exposed to Medicaid estate recovery. Estate recovery refers to the right for states to recover part of the money spent during the Medicaid recipient's life.
In other words, after the person who received Medicaid benefits passes away, if they leave an estate to be probated, the state can act as a creditor and ask to be reimbursed from that estate. This is true even if it means the heirs of the deceased get nothing and the property – like a home or small business – that is subject to estate recovery was non-countable when applying for Medicaid.
Third, depending on state law, the property in the LLC must be used for actual and valid business and trade purposes in order to qualify as a Medicaid-exempt asset. This typically requires that the business be in current operation. The individual applying for Medicaid may also need to be an active participant in the trade or business.
In other words, if you suddenly convert your vacation home to an Airbnb that's owned by a newly minted LLC, it's possible for the state Medicaid agency to conclude that the house isn't being used in a true business or trade. To show that your LLC is a valid business, you'll have to provide evidence in support, such as years of operation, income for the past few years and relevant tax returns.
Does this mean I can use an LLC for Medicaid planning purposes?
Maybe. If your LLC is a true family business and you want to prevent the property in it from affecting your Medicaid eligibility, then you're probably fine. But if you created an LLC simply to accumulate assets you want to be exempt from Medicaid eligibility determination, then your plan of using an LLC may not be successful. Fortunately, there are other alternatives to consider, but they have their own advantages and disadvantages.
For example, you could create a Medicaid asset protection trust. This is an irrevocable trust that you can put your assets into to protect them from Medicaid eligibility consideration.
Irrevocable trust for Medicaid planning
There are a few things to be aware of when using irrevocable trust for Medicaid planning.
First, you give up full control of the property you place in the trust, including the right to receive trust property. And whoever you choose to be the trustee will need to be someone you can rely on to not waste or misuse the trust property.
Second, as its name implies, the terms of the irrevocable trust can be very difficult to change, if not impossible. So if your first choice for trustee turns out to be a bad one, you could be out of luck.
Third, the Medicaid asset protection trust only works when you transfer the assets into the trust at least 60 months (for most states) before you apply for Medicaid. If you apply for Medicaid before this look-back period has gone by, all of the property in that trust could be countable for determining your Medicaid eligibility.
Fourth, as is the case with LLCs, the property in a Medicaid asset protection trust might be ignored for Medicaid eligibility purposes, but the income generated by the property in the trust may still be counted.
Also, the irrevocable trust could cost several thousand dollars to create and set up. So it's often only used when there are significant assets to protect.
Another option is to transfer your countable Medicaid assets to a close friend or family member as a gift. This will work, but there are two potential problems that mirror the use of a Medicaid asset protection trust.
One problem is that the person you transfer the property to might decide to keep the property for themselves and not let you use it or have it back when you ask for it. Another problem is that most states have a 60-month look-back period, which will examine (and count) these transactions in the five years before applying for Medicaid.
These problems exist when gifting the property, but Medicaid will consider a transfer a gift unless you receive fair market value for the transaction. So, giving your car collection worth $500,000 to your child for just $50 will be considered a gift when deciding Medicaid eligibility. Therefore, Medicaid will view you as having around $500,000 in countable assets relating to vehicles, not $50.
Conclusion
Your family business LLC may be a Medicaid-exempt asset, but the income produced by your LLC probably won't be. There are other Medicaid eligibility planning approaches, but none of them will be perfect for every situation or every individual. So it's usually well worth the money and time to talk to a Medicaid or estate planning professional to decide your best course of action.