When you are evaluating your financial situation as you approach retirement, you may gain some comfort from the fact that you should be able to leave behind a suitable legacy for your family after you are gone.
You have done the math, and you have ample resources to draw from during your active retirement years, and you know that Medicare will pay for most of your health care expenses. Though you understand the fact that there are out-of-pocket costs, you recognize the fact that they will be manageable for you.
This is all well and good, but if you are going to preserve your legacy, you have to consider the expenses that you may incur after your active retirement years are behind you. Many seniors require nursing home care, and the Medicare program will not pay for long-term care.
A few years in a nursing home could cost you hundreds of thousands of dollars, and this can be a devastating blow to your legacy.
A Possible Solution
You are probably aware of the fact that Medicaid is another government run health insurance program. It is jointly administered by the federal government along with each respective state government. This program is only available to people with very limited financial resources
Because Medicaid is in fact a need-based program, there are income and asset limits. The asset limit for a single individual is $2000, but everything that you own is not considered to be countable.
Your home is not counted, but there is an equity limit. In the state of Indiana in 2016, the home equity limit is $552,000. However, if a healthy spouse is remaining in the home, there is no equity limit at all.
Plus, the healthy spouse is entitled to a Community Spouse Resource Allowance, which is equal to half of the shared assets that are countable. The maximum allowance in our state during the current calendar year is $119,220, and the minimum is $23,844.
The vehicle that you use for transportation is not looked upon as a countable asset, and you can retain ownership of your household goods and personal effects. Under Medicaid rules, your wedding ring, your engagement ring, and your heirloom jewelry would not count.
A whole life insurance policy valued at up to $1,500 is not countable, and you could also retain $1,500 that is earmarked for burial or cremation expenses. Unlimited term life insurance is allowed.
When it comes to assets that are countable, a Medicaid planning strategy would include a Medicaid spend down. This is somewhat self-explanatory: you give away or spend assets before you apply for Medicaid coverage. You could essentially give your loved ones their inheritances in advance.
Direct gift giving is possible, but you could also choose to fund an irrevocable Medicaid trust to get assets out of your own name.
Five-Year Medicaid Look-Back Period
A thought may come to mind when you hear about the Medicaid spend down concept. You could hold on to your assets until and unless you find out that you need long-term care. If you require living assistance at some point in time, you could give away your assets so that you can qualify for Medicaid.
The Medicaid program wants to prevent this type of thing, so there is a five-year look-back period. When you apply for Medicaid coverage, Medicaid administrators will examine your financial transactions going back five years. If they find that you have divested yourself of assets within this five year period, you will be penalized, and your eligibility will be delayed.
What is the duration of the penalty? Let’s explain by way of a hypothetical example.
Suppose the average annual cost of nursing home care in the state of Indiana is $100,000. You gave your children $200,000 during the five-year look-back period.
Because you gave away enough to pay for two years of nursing home care, your eligibility for Medicaid coverage would be delayed by two years.
Advance Planning is Key
If you want to qualify for Medicaid late in your life, advance planning is required because of the five-year look-back. Program rules are complicated, but there are legal steps that you can take to position your assets optimally if you act at the right time.
If you would like to obtain more detailed information about Medicaid planning and other important estate planning and elder law topics, download our special report. This report is free, and you can click the following link to access your copy: Free Estate Planning Report.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.