Medicaid Planning Update

We are often asked how to protect a client’s assets from the costs of long term care or nursing home expenses. By now, you probably know that Medicaid planning has become more difficult, certainly in light of the Deficit Reduction Act of 2005. While a few key provisions of that law make planning more difficult, some planning opportunities still exist.

First, the so-called look-back period for all transfers has been extended to five years from three years. The look-back period refers to the time period in which asset transfers are scrutinized and potentially result in Medicaid disqualification. Previously, there was a five-year look back only for transfers to or from a trust.

Second, the beginning date for the purpose of determining the penalty period has been changed from the date of the transfer to the date of admission in the nursing home or, if later, such time that the individual, essentially, owns no assets.

Third, under prior law, an individual could retain ownership of a home with no limit on its value as long as he or she had a reasonable intention and ability to move back to the home from the nursing home. Now, this rule only applies if the amount of equity in the home does not exceed $750,000.00. Reverse mortgages are now specifically authorized as a way to reduce the amount of the equity in the home.

The planning opportunities have been curtailed, but not eliminated. For example, it is still generally advisable, when a spouse is admitted to a nursing home, to transfer the family home to the spouse who remains in the family home. The so-called community spouse could then disinherit the institutionalized spouse. This avoids a situation where the institutionalized spouse receives the family home if the community spouse passes first.

An additional planning technique is the so-called “half a loaf plan,” with a modification to take into account the new rule pertaining to the start date for the look back period. Under this plan, the individually transfers all of his or her assets to his or her heirs. The heirs then execute a promissory note to pay approximately one-half of the assets back over a period of time.

A couple of caveats for the modified half a loaf plan to consider – the plan does not protect all assets, only a portion (generally one-half) and the plan must be sensitive to the gift tax consequences. As most people are aware, a gift in excess of $12,000.00 per year per person is generally subject to gift taxation. Finally, as was the case before the changes in the Medicaid rules, prior planning is essential.