HomeHow to Restructure Your Assets to Qualify for Medicaid

How to Restructure Your Assets to Qualify for Medicaid

There is a common misconception that Medicaid is only for the poor and low-income seniors. But in reality, with a little proper and thoughtful estate planning, all but the very wealthy can qualify for program benefits.

In 1965, Congress created Medicare to enhance insurance coverage and ensure greater solvency for seniors—regardless of income, current health status, or past medical history. At the same time, they defined the criteria for Medicaid – a state-run, means-based program to provide additional coverage to low-income and disabled individuals and families.

Unlike Medicare, Medicaid is not a federally operated program. Working within broad federal guidelines, each state individually decides on Medicaid eligibility criteria, eligible coverage groups, covered services, administrative and operational procedures, and payment levels.

However, what makes Medicaid particularly attractive is its ability to cover long-term home hospice care costs and many home health care costs—things Medicare doesn’t cover. Imagine working, saving, and investing for a lifetime, only to see your wealth quickly vanish due to long-term care costs – assets that would otherwise provide a meaningful legacy for your family.

Strategies to meet income requirements

Due to the cost and increasing need for long-term care, Medicaid has become a highly valued feature, providing coverage for long-term nursing care in addition to many home health services. But the current income limit for Medicaid exemptions in most (but not all) states is $2,382 per month ($28,584 per year) per person.

If your income exceeds your state’s Medicaid eligibility limit, there are two commonly used trust funds that can be used to transfer excess income in order to maintain your eligibility for the program:

  • Qualified Income Funds (QITs): Also known as a Miller Fund, this is an irrevocable trust in which your income is deposited and then controlled by a trustee of your choice. There are very strict limits on what income deposited in the fund can be used for (eg a personal marital “needs provision” and if applicable, plus any medical care costs, including the cost of private health insurance premiums). But because the money is legally owned by the trust (not you individually), it no longer counts against your eligibility for Medicaid income.
  • Combined Income Funds: Similar to QITs, these are irrevocable trusts into which “excess income” can be transferred to maintain Medicaid eligibility. In order to benefit from the income pool credit, you must qualify for disability. Your income is pooled with the income of others, and is managed by a charitable, non-profit organization that acts as a trustee and makes monthly payments to pay expenses on behalf of the individuals for whom the fund was created. Any money left in the trust upon your death is then used to help other people with disabilities in the trust.

Essentially, these income funds are specifically designed to create a legal pathway to Medicaid eligibility for those who have too much income to qualify for assistance, but don’t have enough wealth to pay the increased cost of much-needed care.

Strategies to meet asset requirements

Like income restrictions, the Medicaid “asset test” is complex and varies from state to state. Generally, the value of your home is exempt (up to the maximum amount) as long as you still live there or intend to return. Furthermore, most states require you to spend other assets of about $2,000 per person ($4,000/couple) to qualify.

You can simply choose to transfer ownership of your assets to other family members. But this introduces a number of new risks – from losing those assets as a result of divorce, facing bankruptcy/a lawsuit, or dying in front of you. Additionally, you depend on this individual to be trustworthy and financially wise. And it’s not quite that simple, considering Medicaid’s five-year review period (more on that in a bit).

Instead, you may want to consider:

  • Asset Protection Funds: You can transfer most or all of your assets into a trust that, if properly designed, removes those assets from your holdings. Often referred to as “Medicaid funds,” these asset protection structures can help you not only qualify for Medicaid benefits, but also protect your assets from other potential creditors. If income-producing assets (such as stocks and bonds) are placed in the trust, you can choose to receive income from those assets. You can even transfer your home to the trust and retain the right to live in it for the duration of your life. Then, upon your death, the assets will be distributed to the beneficiaries in accordance with the trust documents. Furthermore, the beneficiaries will enjoy a “step up” based on any trust assets when they receive them – to avoid capital gains from the increase in value accrued during your lifetime.
  • Transfers and rejections between spouses: Medicaid laws allow assets to be transferred between spouses—without being subject to the five-year review period or any penalties. Therefore, married couples can transfer any assets in the name of the spouse who needs care to the other spouse. Some states (for example, New York and Florida) allow something called “spousal refusal” – where a legally healthy spouse can refuse to provide support to a spouse who needs foster care, making them immediately eligible for Medicaid services. While Medicaid has the right to request a financially sound spouse contribution of the spouse receiving care, it sometimes chooses not to go through the required legal process of requesting payment. Even if they do, they are generally willing to deduct the cost of services significantly. So this can be an effective strategy.

Another option you may want to consider to reduce your “countable assets” is to create an irrevocable funeral fund, which allows you and your spouse to pay funeral and burial expenses in advance. Some very wealthy couples even choose to pursue Medicaid divorce, Where the spouses are legally divorced only for the purposes of protecting their property for the healthy spouse.

Why advance planning is important

It’s never too late to start creating a healthcare plan. But like all planning, the more time you have, the more flexibility you have and the easier it becomes. Medicare uses a five-year review period when investigating an applicant’s finances.

Transfers of certain assets made less than five years prior to seeking home care or admission to a nursing home or living facility may not be permitted. This means, for Medicaid purposes, that you will still own it and will be required to spend it before you qualify for program coverage. Transfers to a trust, just like transfers to individuals, are still subject to this prior review period.

Keep in mind that Medicaid gives you little or no choice about where you receive care. Only facilities with Medicaid-approved beds can accept you, and your ability to stay in your home when receiving care is decreasing, since many states cover only limited home health care services through their Medicaid programs. Therefore, it is a good idea to sit down with your financial advisor to carefully explore the various long-term care insurance options before deciding on a strategy.

Thirty states and the District of Columbia offer state tax incentives to residents who purchase long-term care insurance policies. Almost all states participate in the Long-Term Care Partnership Program, which allows people who have purchased long-term care insurance to qualify for Medicaid while keeping some of their assets rather than spending them.

Janney Montgomery Scott LLC, its affiliates and employees are not engaged in providing tax, regulatory, accounting or legal advice. This material and any tax-related statements are not intended or written for use, and cannot be used or relied upon by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Vice President and Head of Wealth Planning, Janie Montgomery Scott

Martin Shamis is Head of Wealth Planning at Janie Montgomery Scott, A full-service financial services company, providing comprehensive financial advice and services to individual, corporate and institutional investors. In his current role, he is responsible for the strategic direction of the wealth planning team, supporting more than 850 financial advisors advising Jani’s private retail client base. Martin is a Certified Financial Planning™ specialist.