Tools to Pay for Long-Term Health Care and Protect Your Estate
Retirement should be an age of few worries. However, after the first few weeks or even years of leisure, travel, and time spent with your family, you may begin to harbor growing concerns about protecting your rights and assets as you age – both for yourself, as you may face increased medical difficulties, and for the loved ones who will survive you. If you suffer a major injury or develop a catastrophic medical condition, the cost of your health care could wipe out your assets, leaving you wondering how you will keep yourself afloat in your final days – days that you’d hoped to spend in comfort after a life of hard work – and leaving your children or beneficiaries with nothing to inherit after you’ve passed.
For middle- and low-income Americans, Medicaid is one solution. The Social Security Amendments of 1965 added the Medicaid program as a new title under the Social Security Act. Under the program, the federal government provides matching funds to the States to pay the healthcare costs of low-income residents. Medicaid has gone through several shifts since then, as lawmakers grappled with drug costs, added a provision contributing to the education costs of children with special needs, and expanding Medicare eligibility (in many states) with the passage of the Patient Protection and Affordable Care Act in 2010. The most important shift, however, has been more gradual than any of these Medicaid expansions and amendments: designed to serve the nation’s low-income citizens, Medicaid has become the de facto standard long-term healthcare insurance provider for the middle class.
However, not all citizens who need Medicaid qualify. In New York State, if you have savings in excess of about $15,000, or a weekly income of $1,200 (between you and your spouse, if you are married), you will not qualify. Many elderly people find that it makes sense for them to give away assets to qualify for Medicaid. There are, however, many ways to “gift” assets and intentionally impoverish oneself – all with advantages and drawbacks.
Medicaid estate recovery – and how you can avoid it
There is a “catch” to Medicaid – one particularly problematic for the middle class. In 1993, Congress’s Omnibus Budget Reconciliation Act required states to implement and enforce Medicaid estate recovery, a process by which the state sues (through probate) to recover all Medicaid expenses from deceased Medicaid recipients. This can wipe out the estates of low-income recipients entirely, and can take serious chunks out of the estates of middle class recipients. For most middle-class Medicaid recipients, it’s not just money lost. Often, a middle-class decedent’s largest asset is a house – usually a house the person had intended to pass down to children. Instead of going to the children or other beneficiaries of a will, the assets will go to the state, to prolong the life (and delay the reform) of an unsustainable welfare program.
Medicaid planning is a way around this “catch.” By using certain tools beyond the last will and testament, a person can arrange assets so as to become “artificially impoverished,” first qualifying for Medicaid, and then keeping those assets out of the estate that is subject to probate. These tools include living trusts and life estate deeds, discussed further on.
The ethics of Medicaid planning
On January 12, 2017, the United States Department of the Treasury released its “Financial Report” for the previous year. In that report, the Fiscal Service of the Treasury Department stated that the current trajectory of spending in the U.S. is unsustainable, and Medicaid is a significant part of that problem. It noted that “persistent growth of health care costs, the retirement of the ‘baby boom’ generation, increasing longevity, and lower birth rates leave a remaining imbalance between spending and revenue.” The practice of Medicaid estate recovery is supposed to address that imbalance – though no one is foolish enough to think that full estate recovery from every Medicaid beneficiary would come even close to closing projected Medicaid budget deficits.
By some standards, then, it would be unethical for a person who benefitted from a welfare program to “game” that welfare program and deny it funds that legislators have identified as necessary for the program to continue to benefit others.
There is a significant consensus among legal and medical professionals (as well as “average” citizens) that estate planning can be ethical, however. Randy Cohen, ethical columnist for the New York Times from 1999-2011, once advised a woman who was considering the drastic measure of divorcing her husband, who was suffering from Alzheimer’s, so that he could qualify for Medicaid and both could protect their modest assets (about $90,000 combined). She was not the first to try this gambit: it’s called a “Medicaid divorce,” a divorce in name only, for people in similar situations. Cohen advised the woman that her husband’s condition almost certainly spelled poverty for both; divorce, he said, was an ethical option both because it would allow the wife to continue to give her husband the best care possible while supporting him emotionally, and because her “Medicaid divorce” was not, to his eyes, a “loophole,” but adhered to the regulations governing Medicaid. (He advised, the woman, however, that she could explore less drastic options than divorce.)
Consider, too, that the baby boom problem – the fact that there will be fewer young people paying taxes to support social services like Medicare for the ageing baby boom generation – is no new revelation. That’s why the Omnibus Budget Reconciliation Act of 1993 established the Medicaid estate recovery rule. However, since recognizing the program’s unsustainability, federal and state governments have done almost nothing to reform the program, fixing the structural problems that make it unsustainable. This was Cohen’s larger point: the government has created an ethical dilemma, and refused to resolve it. The best any individual can do is get out of it by protecting themselves and continuing to care for their loved ones. Make no mistake: estate recovery is no “reform.” It is a trap: it merely seizes assets from decedents and their would-be beneficiaries, people who already paid taxes to support Medicaid.
Legal tools to protect your assets
Simply giving away your assets to qualify for Medicaid is probably not a good idea. If you give away too much, you will face gift taxes, losing money needlessly. Giving away your assets also relinquishes control totally, and could leave you vulnerable. You have other options.
Living trusts and life estate deeds are useful for Medicaid planning, planning for second marriages, and planning for incapacitation. They are also means of keeping certain assets out of probate (the process by which a will is “proved” in court).
Life Estate Deeds
Life estates are like a delayed form of gifting. One party with property transfers part of that property to another party by limiting the first party’s interest in a property to the term of that person’s life. The original owner (usually a parent) still “owns” or retains interest in the gifted property, but Medicaid will not count it against eligibility.
One advantage of a life estate deed is that they are simple and inexpensive to set up. However, once established, the giver or life estate holder (if not the giver) is not able to sell property in a life estate – the receivers (or “remainders”) must consent to any sale. Assets in a life estate will not be part of a decedent’s probate estate, but will be part of the decedent’s taxable estate, and subject to estate taxes upon death, depending on their value.
Inter vivos trusts, or living trusts are legal agreements that allow individuals to designate certain assets to named beneficiaries, but to maintain control of those assets until death. These can be revocable or irrevocable. The individual who creates the trust, known as the grantor, names a person to serve as a successor trustee to follow the trust’s terms after the grantor dies. While alive, however, the grantor may serve as a trustee and control the assets even though they belong to the trust.
For a living trust to go into effect, the grantor must transfer title to the assets into the trust, including bank accounts, stock certificates, and real estate. For example, if a property owner executes a trust that states the piece of property belongs to that trust, this has no effect unless the property owner has also executed a deed.
But, assuming the original owner does execute separate deeds to transfer assets into the trust, the trust allows a great deal of flexibility and tailoring. While a property cannot be “taken out” of an irrevocable trust, the trustee might sell the property so long as the proceeds stay in the trust. This is ideal for individuals who have young children. The trustee would not require the beneficiaries’ permission to modify or sell assets in the trust – again, so long as all proceeds stay in the trust. In addition, “ownership,” for tax purposes, stays with the trustee: beneficiaries of a trust would not suffer the tax liability of “owning” any property in that trust. One downside of a living trust in comparison to a life estate is that the former are more complicated and expensive to establish.
Health Care Proxies and Power of Attorneys
Complications can arise when health issues interfere with a person’s ability to make decisions about healthcare and assets. Comas, Alzheimer’s, and dementia can leave a person incapacitated and vulnerable – and could “freeze” their assets. You can save your beneficiaries and loved ones time, stress, and expense in the event that you were to become incapacitated by establishing power of attorney and a healthcare proxy – people you can entrust to make legal and healthcare decisions for you.
Friedman & Ranzenhofer – Your Estate Planning Attorneys
It’s important to remember that in almost all cases, establishing a living trust or life estate will trigger a five-year period of Medicaid ineligibility. You should not delay meeting with an experienced estate planning attorney, then, to plan for your healthcare late in life, and the protection of your assets after you die.
Call our offices today to set up a free consultation. We offer flexible hours at seven offices throughout Western New York, and we do make house calls. In the meantime, you can explore further resources on our legal blog and videos page. Be sure to browse through our 2017 New York Medicaid Guide as well. After you set up a consultation, you should examine this New York Medicaid Application Checklist, and print out and complete our Information for Medicaid Planning worksheet.