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Two seniors talking about Medicaid maintenance and how it relates to the community spouse

Maintaining Medicaid with a community spouse may require strategic planning

by Kelly Gicale | Contributor
Sept 19, 2022

Medicaid coverage can be invaluable to have in your later years, especially when you, your spouse or both of you need to move into a skilled nursing facility, commonly called a nursing home. This is because as you likely know, this kind of medical care has become more and more costly in recent years. And because we are living longer, more people will need to rely on skilled nursing assistance at some point in time. Without Medicaid, you must pay for the exorbitant cost of this necessary care using your own resources, which can become impractical or even impossible if you outlive your assets.

Things can become even more tricky when one spouse must receive skilled nursing care while the other “well spouse” can continue to live independently without the need for such care. In this situation, the Community Spouse Resource Allowance will permit the spouse who is not receiving skilled nursing care to keep assets needed to continue to live on their own while the other spouse receives Medicaid coverage for their care.

Depending on which state you live in, this could be 50% of your shared non-exempt assets within a certain range or up to a certain threshold, or it could be 100% of your wealth up to a certain amount.

When one spouse continues to live at home when the other is in a skilled nursing facility (and receiving Medicaid coverage to pay those costs), the assumption is that the spouse receiving care in a facility will die first. While this may be the case in most circumstances, there are times when the “community” spouse passes away first.

In this article, you can learn about what could happen if you experience this kind of situation in the future. You will read about what the death of the community spouse means for the surviving spouse's Medicaid coverage and how to address this potential outcome through comprehensive estate planning. By planning ahead and working with an experienced attorney who understands the importance of retaining Medicaid coverage for skilled nursing costs, you can protect yourself, your spouse and your assets.

First, it can be important to understand the terms and basics of how Medicaid coverage works when one spouse is in a nursing home while the other continues to live in the couple's home.

What is a community spouse for Medicaid?

For purposes of Medicaid, a spouse who continues to live independently without needing coverage is known as the “community spouse.” In the context of a couple where one spouse is in a nursing home and the other remains at home, the person receiving skilled nursing care generally needs Medicaid coverage to pay those costs while the other spouse does not require this benefit.

This is why the Community Spouse Resource Allowance and other provisions exist, so that the community spouse can retain at least a portion of their wealth to pay for their lifestyle without having to spend down their assets to obtain Medicaid coverage for their spouse, which may otherwise be necessary in order to qualify.

Can the community spouse sell their house?

Another question that people often wonder about with this circumstance is whether or not the community spouse can sell their home without jeopardizing their husband's or wife's Medicaid coverage.

The timing of a jointly owned home sale can be critical. Without proper planning and a complete understanding of its implications, the sale of your home can cause you or your spouse to become ineligible for Medicaid coverage. When that occurs, you would have to spend down the proceeds of your home sale in order to qualify for Medicaid, perhaps needlessly depleting your assets.

If you were to sell the home before you or your spouse needs skilled nursing care, then the proceeds would count against you for Medicaid eligibility purposes. If, on the other hand, you waited until after one spouse is in a facility receiving Medicaid support, you could sell the home without losing all of those funds.

If you chose that option, half of the proceeds would be considered yours and half would be treated as owned by your spouse. If your spouse were the one receiving care, then their share would still need to be spent down to maintain their Medicaid coverage, but you could retain your half of the proceeds as the community spouse.

Another option that would likely be better to consider is to transfer ownership of the home to the community spouse. Under applicable laws, you can transfer ownership of your home before applying for Medicaid without penalty and within 90 days from the date you are notified of Medicaid eligibility. After transferring ownership, you as the community spouse could then sell your home and retain all of the proceeds without having it impact your husband's or wife's Medicaid coverage.

However, as you'll see, the best option for protecting your wealth, including the proceeds from the sale of your home, may be to use a vehicle like a supplemental benefits trust. Without one, the community spouse will still need to spend down funds from the sale of the home if he or she were to require Medicaid coverage to pay for skilled nursing care in the future.

What if the community spouse dies first?

When one spouse must go into a skilled nursing facility while the other remains at home, the assumption is usually that the person receiving care will pass away first. However, that's not always the case. Failure to account for this possibility in your estate plan could have catastrophic consequences, so it's important to incorporate strategies that protect the surviving spouse's Medicaid coverage should this be the case for you.

Most married people who have engaged in some level of estate planning often have wills that leave all of their assets to each other. This means that in many cases, the community spouse's will names their spouse as the primary beneficiary of their estate, and vice versa.

This may not be an issue if the spouse receiving Medicaid coverage passes away first, as it will simply mean the community spouse inherits whatever assets they still held upon their death. However, if the community spouse passes away first, this could cause their surviving spouse to lose the Medicaid benefits they rely on to pay for skilled nursing care.

An inheritance from the community spouse cannot be disclaimed, meaning the surviving spouse would be forced to receive the community spouse's assets after they pass away. This inheritance would likely put the surviving spouse over the asset limit for Medicaid purposes. In this situation, the inheritance will be rapidly dissipated to pay for care, as the surviving spouse would lose their Medicaid coverage. It also would be subject to estate recovery, meaning the government could go after any funds remaining to repay for Medicaid benefits received once the surviving spouse also passes away.

However, with proper planning, this outcome can be prevented. You can protect your assets regardless of what happens in the future with the assistance of an estate planning professional and use of a supplemental benefits trust.

What is a supplemental benefits trust?

A supplemental benefits trust is a trust created by a third party to provide support for someone without having it affect their government benefits, including Medicaid coverage. Also known as a supplemental needs trust, this option can be useful for anyone looking for provide financial resources for a beneficiary who is disabled as well.

Whether the person needs Medicaid to pay for skilled nursing in their twilight years or Medicaid and other government assistance to pay for daily care due to special needs, a supplemental benefits trust can often be the best way to preserve assets and provide support without jeopardizing the beneficiary's government assistance.

What type of trust would you use for a disabled beneficiary?

As mentioned, just as with a person in skilled nursing care, a beneficiary with special needs could be supported through a supplemental benefits trust without having it affect their Medicaid coverage. This is a third-party trust, meaning someone other than the disabled person creates the trust for their benefit. If the person with special needs were establishing a trust for their own benefit as a means of preserving assets while still receiving government support, then it would be a first-party trust known as a special needs trust.

How can you keep Medicaid benefits with a supplemental benefits trust?

When you establish a supplemental benefits trust, you can protect your assets while still qualifying for Medicaid coverage. This is because assets held in a supplemental benefits trust are not counted for purposes of Medicaid eligibility. Because the assets placed in this kind of trust are not viewed by the law as owned by the trust beneficiary, whether that's a person with special needs or a spouse in a skilled nursing facility, the person relying on government support can benefit from the trust without having it affect their Medicaid coverage.

There are some limitations on this support, however. Because the trust is only intended to provide supplemental financial assistance, it cannot be used to pay for items that are covered by their government benefits. In the case of a married couple where one spouse is receiving skilled nursing care and the other is still living in the community, this tends to not be an issue, as most people this situation would never try to use trust funds to pay for the nursing home costs covered by Medicaid.

Also, supplemental benefits trusts are typically created as irrevocable trusts. This means that if you establish one, you will have a very limited ability to amend or change the trust provisions and remove assets from the trust. This aspect of supplemental benefits trust is exactly why the government will allow you to create one without having it affect Medicaid benefits. If you had greater control over trust assets, then they likely would count against you for determining eligibility.

For most people in a situation where one spouse needs skilled nursing care and the other remains at home, it can be even more advantageous to include a provision in the community spouse's will that creates a supplemental benefits trust after they pass away. By choosing this option, you as the community spouse can continue to use and control your assets during your lifetime. Then, if the community spouse happens to pass away first, the trust will be created upon death to hold assets and provide supplemental support for the surviving spouse without having an impact on their Medicaid coverage.

How does a supplemental benefits trust protect your assets?

In the case where one spouse is in a skilled nursing facility and the other continues to live at home, a supplemental benefits trust can be invaluable for preserving their shared wealth for future generations.

By creating this kind of trust through a provision in the community spouse's will, you can prevent your assets from being subject to a Medicaid “spend down” in the future. This is because when you use this estate planning strategy, it allows you to avoid having the surviving spouse receive an inheritance that will disqualify them from Medicaid coverage.

A doctor reading off a document to a couple of Medicaid patients

Without a supplemental benefits trust, if the community spouse were to pass away first, the spouse receiving care would inherit the couple's wealth directly. When this happens, that inheritance would likely disqualify them for purposes of Medicaid, as it almost certainly would put their total assets over the allowable limit. In this situation, the surviving spouse would need to dissipate or spend down their inheritance in order to qualify for Medicaid coverage again. Most often, this means spending almost all of the couple's wealth on skilled nursing costs - costs that would otherwise be paid for by Medicaid.

If instead you were to create a supplemental benefits trust through the community spouse's will, the inheritance would go into the trust and not count against the surviving spouse. In this way, you can help preserve your wealth instead of using it to pay for care that would otherwise be covered by Medicaid.

With the inheritance in a supplemental benefits trust, those assets can be used to provide additional support for your spouse and improve their quality of life while in a skilled nursing facility. Then, after their lifetime, any amount remaining can then pass to your children, grandchildren or other loved ones, allowing you to leave a legacy behind as well. None of this would be possible if the spouse receiving care receives a direct inheritance.

Summary

While most people would like to live out their days at home with their spouse, this has become less and less common as we live longer and need specialized medical care in our later years. Estate planning that does not account for this eventuality will not allow you to accomplish your goals for your wealth and your loved ones in the future.

This is especially true in situations where one spouse needs to move into a skilled nursing facility while the other can remain at home and continue to live independently. Even though this can present challenges, there are strategies that an experienced estate planning professional can employ to help you protect your wealth and provide for your spouse.

In cases where the spouse living at home, or community spouse, passes away first, advance planning is especially crucial to ensure that the surviving spouse can continue to receive Medicaid coverage to pay for the high costs of skilled nursing care. By including a supplemental benefits trust provision in the community spouse's will, however, you can both protect your wealth and preserve these valuable government benefits. Only by working with an attorney knowledgeable in Medicaid laws can you ensure that your plans account for all of these concerns and accomplish your long-term goals.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
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