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Proactive Medicaid Planning

According to the US Department of Health and Human Services, roughly 70 percent of Americans over the age of 65 will require some type of long-term care at some point in their lives.  

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Understanding Proactive Medicaid Planning

While some people will fund the cost of long term with insurance products or with personal funds, often people lack sufficient means to pay for the exorbitant cost of long-term care, and when the care needs become serious enough, will apply for Medicaid.  

Medicaid can provide the cost of certain types of long-term care if the person does not have enough resources to pay for it themselves.  There is an application process, and a substantial part of the application has to do with your current assets. Since Medicaid is meant for people with nearly no assets, those with some assets in excess of the allowable amount are expected to spend those excess assets down so that they can become eligible. 

This means that if an adult needs long-term care, they will often spend down nearly everything they own, including bank accounts, retirement, etc. to the detriment of the person’s family.   Medicaid also provides that certain assets do not count for eligibility, but after the person dies, they will demand the assets be sold to pay them back for what Medicaid paid for their care.

What is Medicaid Planning?

Medicaid Planning is a broad term to describe the process of navigating around the existing rules to help a person become eligible sooner, possibly without losing their assets and prevent Medicaid from being able to come after assets after death to pay themselves back.

Medicaid Planning can be broken down into two categories:

Crisis Medicaid Planning

Type of Medicaid planning that occurs when someone is within the five year period of needing Medicaid. Most often, this is a person that is either already in a nursing home or is expected to enter one soon. While a lot can be done to help a person become eligible sooner at the “crisis” stage, usually the measures do not save as much of the assets or come with additional consequences.

Proactive Medicaid Planning

Medicaid planning which occurs outside that five year lookback period. Essentially, someone anticipates not needing Medicaid for at least five years but wants to plan for that possibility, so they engage in proactive planning.

So often, individuals find themselves ready to apply for Medicaid to assist in paying for their long-term care but face the reality of owning too many assets, preventing them from qualifying.

It often happens that these individuals “spend down” their assets, either paying for long-term care out of their own pockets or gifting their assets to family members. 

The problem with both of those options is that it leaves no assets to provide for their heirs upon their death. 

One of the most common ways we help a family to proactively plan for possibly needing Medicaid in the future is through an Asset Protection Trust, also known as a Five-Year Trust or Medicaid Trust. 

What is an Asset Protection Trust

Medicaid will only pay for long-term care for people with limited assets.  If you have more than the nominal amount of assets, an Asset Protection Trust, otherwise known as a Medicaid Trust, moves assets into a bucket not subject to Medicaid’s reach, which allows for protection of assets and avoidance of Medicaid recovery.

The Asset Protection Trust is an irrevocable trust, meaning the terms cannot be modified or revoked.  The ultimate purpose of this trust is to allow an individual to transfer their assets for preservation, retaining the rights that Medicaid would allow them to retain, maintain tax benefits, and putting people in charge that you trust to make sure the assets are used as intended, and therefore qualify for Medicaid shortly after the five year mark of creating the trust.

In short, preparation of an Asset Protection Trust is a mechanism to let you divert your assets so that you appear to have fewer assets for purposes of Medicaid eligibility and make assets non-reachable to repay Medicaid when you die. The assets that fund the trust are not counted for Medicaid eligibility if you wait the requisite amount of time before applying.

Why opt for a Medicaid Trust? 

One of the most important reasons to create a trust is to protect assets from the devastating costs of long-term care. According to the 2018 Genworth Annual Cost of Care Survey, the median yearly cost for a private room in a long-term care facility is $100,375. Between 2017 and 2018, the cost of assisted living facilities increased by 6.67 percent, and the costs are expected to continue to rise. Creating a Medicaid Trust and protecting assets such as residences or vacation homes prevents Medicaid from recovering those assets as payment of the debt.

Another important reason to create a trust is due to the possibility of elder exploitation. Examples of exploitation include stealing/withdrawing cash, transferring property deeds, and misuse of a power of attorney. Placing the assets of an elderly person into an Asset Protection Trust can help prevent this behavior. The trust also will preserve the assets for future generations, helping to create a legacy by keeping sentimental property in the family. 

One thing to note is that with a trust, a trustee can be appointed to ensure proper management and distribution of assets. One can also appoint successor trustees, alternate beneficiaries, and provisions for special needs beneficiaries if needed.

A trust also assists in avoiding the probate process upon the death of the creator since there are specific guidelines for distribution to heirs. The probate process essentially is the court overseeing the finalization of your affairs when you pass away.  The use of trusts may prevent the need for any court oversight, but will almost certainly limit it.

Tax Considerations

Another very important reason for using trusts is to maintain the step-up in basis on a property for the next generation.  For example, let’s say you own a home that is valued at $150,000 but when you purchased the house thirty years ago, you paid $75,000. Therefore, the property appreciated $75,000 in value.

You have the option of either gifting the property or deeding it to a trust in order to qualify for Medicaid. If you choose to gift the property, the recipient of the property will be required to pay a large amount in taxes when and if they decide to sell it after your death.

However, with a Trust and proper drafting, you can allow the basis in the property to step up to the value as of the date of your death so that if the home is sold after you pass, there is no gain on the sale and no taxes.  This is one major benefit of a trust over an outright gift, and one of the costliest consequences of an outright gift to a family member of real estate or stock.

Also, Asset Protection Trusts can be made in a way that they are considered a disregarded entity for income tax purposes. This means that any income that results from the trust is filed on your individual tax return. This is helpful since trusts pay higher tax rates than individuals do, so a properly drafted Asset Protection Trust will allow you to have the benefit of a trust, but the benefit of a lower income tax bracket.

Process of Creating a Trust

In our office, planning for the possibility of needing Medicaid will often include the creation of the Asset Protection Trust.  This is often done in conjunction with other general estate planning, which may include a Last Will and Testament, a Durable General Power of Attorney, a Health Care Power of Attorney, HIPAA releases, deeds, and other important estate planning tools. 

The first step in drafting the trust and supporting documents is to gather information in order to obtain a comprehensive picture of the family and financial situation. This normally is done through the completion of a questionnaire and a follow-up consultation with the attorney. Information will be gathered about real estate owned, debts, income, investments, and personal property. Decisions regarding beneficiaries, specific gifts/bequests, and who is trustworthy enough to be in charge will have to be made. Also, if there are minor children involved, guardians should be chosen in the event of death. 

Consultations can be conducted in person or by phone. During the meeting, the attorney will make recommendations and quote fees for the documents that will be prepared. Ideally, the turn-around time for the completion of all documents is a few weeks.

Next Steps for Proactive Medicaid Planning

In order to start the process of Proactive Medicaid Planning, you can call (919) 244-2019 or email [email protected]

Be ready to provide your information as well as information about the person in need of planning. Planning for long-term care is a very important and delicate process. 

Often, we bring up topics which are not easy to discuss, but are necessary to plan for the possibility of incapacity, the need for means-tested benefits, or the inevitability of death.

As North Carolina Attorneys, we serve people and businesses all over the State of North Carolina with assistance on a variety of legal issues.

Durham

(919) 244-2019

2216 S. Miami Blvd., Suite 101 Durham, North Carolina 27703

Sanford

(919) 292-1274

1680 S Horner Blvd. Suite A Sanford, North Carolina 27330

Durham

(919) 244-2019

2216 S. Miami Blvd., Suite 101
Durham, North Carolina 27703

Sanford

(919) 292-1274

1680 S Horner Blvd. Suite A

Sanford, North Carolina 27330

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Christopher C. Wilms
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