At age 65, nearly 70% of seniors can expect to need some form of long-term care in the future. For those without long-term care insurance, this can be a very daunting statistic. Medicare offers limited benefits for nursing home or home health care services. Without long-term care insurance in place, those needing extended care can deplete their assets paying for such services.
For those not wealthy enough to self-insure, there is Medicaid, a joint federal-state need-based health insurance program. The program is designed to provide health care services for those with low incomes. Eligibility varies from state to state, but in general, your assets and income must be below a certain level set by your state. Medicaid planning is a strategy that involves transferring ownership of certain assets and exchanging your countable assets for exempt assets to qualify for public assistance.
Before you begin giving away or retitling your assets, there can be several drawbacks to Medicaid planning, starting with the uncertainty of when you may need care, if at all. Despite the initial alarming statistics, seniors are living longer, healthier lives. Without proper planning, you could give away your assets too early, leaving you with too little to live on. If you never need health care coverage from Medicaid, you could be left with meager retirement assets to the detriment of your own comfort and enjoyment.
Because Medicaid is based on need, the government will want to ensure you have not tried to sidestep the rules in order to qualify. If you were to transfer your assets to your children or fund an irrevocable trust and then need nursing home care within five years, you could become ineligible for benefits. The state will examine you and your spouse’s finances during the five years before you applied for Medicaid. This can be an invasive process and can result in a period of ineligibility if they find you have transferred assets within the look-back period.
Furthermore, what may preserve assets for your heirs from a Medicaid standpoint may be a poor decision where taxes are concerned. Assets transferred during your lifetime have a carry-over basis, meaning your heirs will have the same tax basis that you have, which can result in a large tax bill for your heirs, should they sell the asset in the future. Alternately, for assets inherited after you pass, your heirs receive a step-up in basis to the fair market value of the asset on the date of your death.
Additionally, if your assets are in tax-deferred accounts, such as an IRA, you would have to withdraw the money and pay ordinary income tax on the withdrawal before you could gift it to your heirs. If your child or grandchild were to receive your IRA as a beneficiary after you pass, they would be able to take required minimum distributions over their lifetime, minimizing their tax consequences and maximizing the time the assets could continue to grow tax deferred.
Despite the potential drawbacks, there are some uses for Medicaid planning strategies, such as funding trusts to benefit a special-needs adult child or protecting a couple’s combined assets for a younger, healthy spouse. Each family has to weigh the benefits for their own circumstances
If you have questions on how your assets and estate plan could affect Medicaid eligibility, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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