Long-Term Care Insurance Myths From Realities
1. Giving Away Money or Making gifts to reduce a Medicaid applicant’s countable assets.
Giving away assets or income within five years of applying for long-term care Medicaid will cause the majority of state Medicaid programs to defer qualification of benefits for a period of time (the length of this period if ineligibility depends on the value of the gifted assets).
To read more about the medicaid five year look-back rule or watch a video on the five year look back for medicaid, (five year medicaid rule video #2) click on the links.
Essentially, any transfer of funds or assets, for less than fair-market value will create a problem. Just because the IRS allows gifting does not mean Medicaid does as well (they don't). Medicaid rules do not have to match IRS regulations - they are two totally different agencies.
2. Relying on outdated or poorly drafted durable powers of attorney or other estate planning documents when attempting Medicaid planning.
I see too many free internet forms that fail to meet state statutory requirements. Relying on an old or bad power of attorney form can hamstring our Medicaid planning efforts, or require a guardianship proceeding.
To read an article that further explains the potential problems with old powers of attorney, click the link.
3. Failure to create or properly maintain a Qualified Income Trust (QIT) or Miller Trust.
In most states with an income cap, a QIT or Miller Trust is essential when a Medicaid applicant's gross income exceeds the monthly income cap. If you do not create a properly drafted Miller Trust, and fund it during the same month as when the Medicaid application is submitted (and each month thereafter), the Medicaid application will be deemed ineligible.
To read more about Medicaid income trusts (QITs) or to watch a video further explaining how Miller Trusts work or how Medicaid income trusts are properly funded, click the links.
4. Failure to take required minimum distributions from qualified retirement accounts.
Most people know that qualified retirement accounts (e.g. IRAs, 401ks, SEPs) are treated differently then other investment accounts. They are given special consideration by the IRS and are protected against the threat of creditors.
Fewer people are aware that, depending on your state, there may be specific steps that you can take to ensure that they are not held against you as a “countable resource” when determining whether you are or are not eligible for Medicaid.
Many states have a rule that says, if a Medicaid applicant is taking regular distributions from their 401k or IRA, then the asset itself will be deemed exempt. However, the distributions are counted as income, which may necessitate the creation of a qualified income trust / miller trust depending on the state.
5. Failure to liquidate certain annuities or life insurance policies that possess cash surrender value.
Some states allow life insurance policies with small face values to be held without it negatively impacting eligibility. The values allowed, if at all, will differ between states.
As a result, many Medicaid-planning clients will either have to borrow against their life insurance cash value or liquidate completely before submitting a Medicaid application.
Certain life insurance policies do not have cash value (i.e. term life insurance) and will not be considered countable assets. But universal or whole life policies almost always have a cash-value accumulation component and must usually be dealt with appropriately in order to become eligible Medicaid long-term care benefits.
Non-qualified annuities may also have cash value and that cash value will be counted as an asset against Medicaid eligibility. Regular annuities can be converted into a medicaid-qualified annuity or cashed out.
6. Failure to have the funeral contract made irrevocable before submitting a Medicaid application.
A funeral contract is usually considered to be a countable asset if its refundable. If this causes countable assets to exceed the $2,000 Medicaid limit. Most states allow for a simple fix: ask for an irrevocability rider to ensure that the funds cannot be returned.
7. Failing to Reveal all Assets or Income Sources to Your State Medicaid Agency
When you apply for Medicaid, you will likely also sign a financial release that allows Medicaid to access your tax returns and write to any financial institution to investigate your bank accounts, brokerage accounts, etc... Failing to report all assets is a crime.
Plenty of people apply and are subsequently denied because they did not fully disclose (intentionally or not) that they had certain countable assets.
8. Failing to plan for the possibility that the community spouse might predecease the institutionalized spouse receiving long-term care Medicaid.
According to some statistics, about 30% of caregivers will die before the people that they care for do. This is often because care-giving can be so stressful. When it’s a spouse, it can be difficult for the caregiver to remember to take care of themselves. Ordinary estate planning has one spouse leaving the entirety of their assets to their surviving spouse. But if a community spouse (not receiving Medicaid) only has a will (or dies intestate) that leaves assets to the spouse who needs long-term care Medicaid services - this can unintentionally result in the loss of Medicaid.
This is why an elder care attorney also needs to have a good grasp of estate planning – to protect against the above potential scenario.
9. Failing to Apply for Other Benefits.
Medicaid wants to be the "payor of last resort" what this means is that if the applicant is entitled to other benefits, then they have an obligation to apply for those benefits. As an example, someone younger than age 65 who needs help at home or requires ALF or nursing home care, would be a candidate to apply for social security disability. They must do so. The other common example is applying for VA pension with aid and attendance benefits if eligible to do so.
It’s easy to understand why Medicaid wants this. If social security and the VA are paying for a portion of one's long-term care needs, then Medicaid has that much less to contribute.
Links to Author’s Resources
Free Webinars: https://www.elderneedslaw.com/webinars
YouTube Channel: https://www.youtube.com/@elderneedslaw
Medicaid Planning Book: https://www.amazon.com/Medicaid-some-your-long-term-expenses/dp/1513634712