As we get older, we lose our ability to do the things we used to. Eventually, there comes a point where we struggle to do the simplest things, such as caring for ourselves. Sometimes, this is due to getting older; other times, it might be the result of a health condition, such as a stroke. Either situation often requires the need for assisted living or long-term nursing home care.
Because either type of care can be very expensive, Medicaid is often used to help pay for it. But not everyone is eligible, and only certain groups can use Medicaid. And even then, that's only if they meet certain financial requirements.
Many individuals will only qualify for Medicaid if he or she first does a Medicaid spend down.
In this article, we'll focus on using Medicaid spend down to meet Medicaid's financial eligibility requirements while protecting your assets as much as possible.
What is Medicaid and how does it work?
Medicaid is a complex joint state and federal program that offers health care benefits to individuals of limited financial means. Medicaid is not the same as Medicare, as the latter focuses primarily on providing health care coverage to older Americans. However, Medicaid will sometimes apply when Medicare doesn't, such as with assisted living services and long-term care assistance.
One of the biggest eligibility requirements of Medicaid is that applicants must meet the financial resource requirements. This usually means they need to be below a certain income and property threshold. That threshold varies among states, but you can expect an individual monthly income limit of roughly $1,000 per month and an individual asset limit of $2,000.
This latter limit seems low, but that's because there are several types of property that are exempt. Generally speaking, these exempt assets include:
- A primary home
- One motor vehicle
- Personal household property
- Certain types of life insurance policies
States also vary as to types of property that are exempt from Medicaid financial eligibility determination and any caps on the value of those properties. For example, a primary home is exempt, but only up to a certain value. If your home is worth $1 million, you should expect roughly a third to one-half of that value to still be considered when it comes to determining Medicaid eligibility.
Using Medicaid spend down to become eligible
Because Medicaid has both income and asset eligibility requirements, individuals may need to take a two-pronged approach when engaging in Medicaid spend down to become eligible for Medicaid. These methods are often referred to “asset spend down” and “income spend down.”
Asset spend down
Asset spend down refers to steps you can take to reduce or eliminate assets that get counted (countable assets) when determining financial eligibility for Medicaid. As mentioned, not all assets get counted (non-countable assets), like a primary residence and one vehicle. But many other assets are counted for Medicaid eligibility purposes, such as:
- Bank accounts
- A second home, like a beach house
- Investments, like stocks and bonds
If your assets make you ineligible for certain Medicaid benefits, you can sell them at fair market value, then use the proceeds to purchase non-countable assets.
For instance, let's say you had $20,000 in cash in a bank account and a 10-year-old car that's worth $5,000. If you did nothing, you wouldn't be eligible for Medicaid because your cash on hand is a countable asset that most likely exceeds state limits. One way around this would be to sell your used car, then take the proceeds from the sale, plus the $20,000 cash and buy a brand-new car. As long as you have no other vehicle, this new car would most likely be exempt from Medicaid eligibility calculations.
You could also use the proceeds of a sale of a countable asset to pay off legitimate debts, such as a mortgage, car loan or credit card bills.
Income spend down
Income spend down applies when you spend some of your income on eligible expenses to reduce available income for Medicaid eligibility purposes. Let's look at a hypothetical to illustrate.
Let's say you receive $1,000 per month (from Social Security) and your state's Medicaid income limit is $900 per month. You're over your state's Medicaid income limits, but you want to find a way to get Medicaid to help pay for your nursing home costs. You would need to spend down $100 per month to get Medicaid to pay for your nursing home bill.
But you can't just spend the $100 money on anything. You need to spend it on qualified medical expenses, like health insurance premiums, prescription drugs, eligible medical equipment, doctor's visits and transportation costs to and from your health care provider.
As you can see, there are plenty of rules and limitations on how you can spend your money to obtain Medicaid eligibility. If you violate one or more of these rules, it won't necessarily mean you can't get Medicaid. But it might reduce the benefits you receive or how long you have to wait to get them.
As if asset spend down and income spend down weren't complicated enough, there's also something called the look-back rule. This rule recognizes that the asset spend down and income spend down requirements can't apply to every financial transaction you engage in. For instance, you shouldn't lose Medicaid eligibility for something you sold or gave away 20 years ago.
The five-year look-back rule
The Medicaid look-back rule imposes financial penalties for certain types of transactions that occur within a certain period of time before applying for Medicaid benefits. The reasoning is that had these transactions not occurred, the property could have been used to help pay for long-term care instead of the individual relying on Medicaid.
In the vast majority of states, this look-back period is five years. Any transaction from this time period that doesn't meet the requirements of an asset spend down or income spend down will be “counted” and used to reduce the Medicaid benefits you might receive for long-term care.
What these penalties are will vary from state to state, but they often involve the average cost of long-term or assisted living care for that state. To give you a very rough idea of what penalties you're looking at, for every $5,000 you give away during the look-back period, you can expect to lose out on about one month of long-term care Medicaid benefits.
OK, but what kinds of transactions get “counted” for Medicaid look-back purposes? Assuming they don't qualify under the asset spend down or income spend down rules, look-back transactions are typically transactions where you give away, gift or otherwise get rid of a countable asset for less than fair market value. So if you have two cars and donate one to charity or give it away to a relative, the fair market value of the vehicle you gave away or gifted will be considered when it comes to whether or not you meet the financial requirements for Medicaid.
The look-back period covers a long period of time and covers so many types of transactions. And when many people apply for Medicaid benefits, it's not something they planned out years in advance. It could be a situation where someone thought they could live alone for the next 10 years, but they have a fall and break a hip. Then there are medical complications during surgery to fix the hip and the next thing they know, they need to move to a nursing home or hire a nurse to care for them while they're living at home.
Therefore, the look-back period often applies during a time when an individual had no idea they would need to be careful in how they spent or distributed their money. That wedding gift they made to their child to help them put a down payment on a new home four years ago? Counted. That irrevocable trust they created two years ago with money or property? Counted.
One important point to remember about the look-back period is that proper documentation must be kept to show much money was actually received in a transaction. Imagine two years ago you sold your sailboat for $50,000, although it had a fair market value of $60,000. After the deal, you didn't properly document the sale showing when it took place and how much you sold the sailboat for. And you also lost any documentation confirming the transfer of ownership of the sailboat. There are two reasons why this is problematic for Medicaid purposes.
First, you don't have documents showing you received fair market value for the sailboat. As a result, the relevant state Medicaid authority will assume you just gave the sailboat away. They will then conclude the look-back rule has been violated and apply the appropriate penalty period relating to how long you need to wait to receive Medicaid benefits.
Second, you have no proof of what you sold the sailboat for. So, the state Medicaid authority will use the $60,000 value and not the $50,000 you actually received. This will make your penalty period even longer.
Exceptions to the look-back rule
The look-back rule can result in some pretty harsh results, so there are some exceptions to its application. These include the transfer of assets to certain people being exempt from the Medicaid look-back rule. Exempt recipients could include:
- A spouse
- A disabled individual under the age of 65
- A child who receives the family home and is under the age of 21 or disabled
- A sibling who receives the family home, and they have an equity interest in the home
What these exceptions are and how they work are far more complicated than what has been portrayed here. Also, don't forget that states have their own laws on how and when the exceptions apply.
Estate planning strategies to protect assets and qualify for Medicaid
Becoming eligible for Medicaid while also protecting your assets is not an easy task. Yet it can be done with careful thought and planning. The exact strategies will depend on your state's laws and your financial circumstances. These strategies often revolve around converting countable assets into non-countable assets.
Earlier in this article, we discussed selling an old car and spending the proceeds from the sale and cash from a bank account to buy a new car. We also discussed using cash to pay off legitimate debts. Some other ways to convert countable assets into non-countable assets include:
- Prepay for burial and funeral expenses. This can often be done by setting up an irrevocable funeral trust. Keep in mind that limits and types of eligible purchases will vary for each state.
- Repairs or improvements to non-countable assets. For example, using cash in your bank account to repair your car or make necessary improvements to your home, like a new roof.
- Purchase an eligible annuity. Not every annuity will qualify, and you may need to make certain adjustments to your annuity for it to be eligible, such as making your annuity nontransferable.
Two other strategies include creating a formal caregiver agreement and planning outside the five-year look-back period.
With respect to the caregiver agreement, your health needs might not require you to be in an assisted living facility. Instead, you can stay home, but you'll need someone to come by a few days a week (or every day) to help take care of you. You're allowed to hire a friend or relative to help take care of you at your home and pay them for their services. The money you spend for these services will not work against you for Medicaid eligibility purposes.
To do this, you'll need to meet certain conditions. These include putting the agreement into writing and outlining its terms, as well as providing compensation that's comparable to what a professional providing similar services would charge.
You can also engage in more conventional estate planning tools, such as personal and charitable gifts, creating an irrevocable trust or using a life estate to protect certain types of property, such as a family home. However, these methods must all be used outside the five-year look-back period. And because no one knows the future, you'll want to implement these strategies sooner rather than later.
Your age and your overall health will probably be two of the most important factors to consider when deciding when to make a gift or create a life estate or irrevocable trust. But remember, if you need Medicaid benefits to help pay for long-term care services before five years pass after their creation, you can expect these estate planning tools to be subjected to the look-back rule. In other words, they have little use as Medicaid eligibility planning tools if something unexpected happens within five years of their creation.
Bottom line
Medicaid financial eligibility planning can be quite complicated and require years of advanced planning. Any Medicaid planning should consider income spend down and asset spend down, as well as be aware of any financial transactions that occur within five years of applying for Medicaid's long-term care benefits.
Finally, because each state will have its own rules on Medicaid spend down, it might be worth talking to an estate planning and/or elder law attorney to figure out exactly what you need to do to prepare for your financial future under Medicaid.