Medicaid vs. Inheritance

Aunt Mildred just passed away and left your Uncle Bob $50,000 in her will. This would normally be a wonderful gift, but Bob is in a nursing home where his bill is paid by Medicaid. So what happens now?

First of all, we are talking about a “bequest” (i.e., gift under a will). “Inheritance” technically refers to the money or other asset(s) a beneficiary receives when a person dies without a will. So when the will is probated and the bequest is found in the will, it means nothing to Uncle Bob until he actually gets a check from the estate. After all, Aunt Mildred may have died with a lot of outstanding debt, and by the time the estate is settled, Bob’s bequest may have to be reduced or even eliminated. So for Medicaid purposes, it doesn’t count until he actually has access to the money, i.e., the cash in hand.

But let us assume that a year later the check comes in. Now what? Well, if Bob is still in the nursing home on Medicaid, he is legally obligated to report the receipt of the money to the state Medicaid department. The money counts as income during the month of receipt, but in the next month it counts as an asset. This will cause Bob to be disqualified for Medicaid due his having more than $2,000 of cash or other countable assets. So what can he do now?

Bob could have “disclaimed” the money within nine months of Mildred’s death so that it passes to the next person (or persons) in line under the will. Unfortunately, Medicaid simply ignores disclaimers and still treats Bob as if he got the money and then gifted it to the alternate recipient(s) named in the will. That will cause a 10-month penalty period. (The length of this penalty period can be longer or shorter, depending on the Medicaid recipient’s state of residence.) So for 10 months, Bob is disqualified for Medicaid. This is not a very good result, since he gave away the very money he now needs to pay the nursing home!

Bob could simply accept the money, pay the nursing home privately until the money is gone and then re-apply for Medicaid. That is fine, except that he really winds up getting no benefit from the bequest at all.

Instead, Bob could use the money to pay for a new television in his room, new furniture, new clothes, even a new car (if it will be used by another family member to drive him to doctor’s appointments, etc.). If he still owns a house, he could use the money to fix it up since it is exempt anyway.

He could also make a gift of approximately half the money and use the other half to purchase a short-term “Medicaid annuity.” That way at least he gets to benefit from half the money. But if he does not own a home and outlives the annuity, this really won’t do him any good.

Unfortunately, the best solution is one that it is now too late to take advantage of. Mildred should have left the money IN A TRUST for Bob’s benefit, which included language stating it could only be used to supplement—and not replace—any otherwise available government benefits. Such a trust can hold any amount of money, and Medicaid will not count it as Bob’s asset. Then the trustee can pay for extra medical treatment not covered by Medicaid such as eyeglasses, experimental treatments, massages, even vacations for family members to visit Bob.

Finally, if a person dies without a will (known as “intestate”) and the beneficiary is on Medicaid, the beneficiary will have no choice but to accept the money and then use one or more of the planning options discussed above to maximize the benefit of the inheritance.

A monetary gift left to a loved one with the best of intentions can actually end up hurting the beneficiary if it is done incorrectly. This is yet another example of how important it is to engage in careful financial and legal planning early on and to continue examining and updating your documents as necessary.

Wedding Bells: If You’re Over 75, Be Careful!

A number of times I’ve been approached by happy family members telling me about an elderly relative who, at age 75, 80, or 85, is getting married and Isn’t that terrific? Well, I suppose it is a happy event, but . . . Unfortunately, the likelihood that a spouse will need nursing home care increases dramatically in later years. And the spouse who continues to reside in the community is legally responsible for paying the costs of nursing home care for the other spouse, regardless of how long they have been married! As you know, those costs can easily exceed $6,000 per month, for a national average nursing home stay of 2.5 years. That’s $180,000.

Now the spouse at home may be able to protect a certain amount of money and get the spouse in the nursing home to qualify for Medicaid, which will indeed pick up the nursing home bill. In most states, that amount is currently $109,540, plus the house, car, and personal property. But if the couple has a total of, say, $400,000, and let’s say most of that came into the marriage as the savings of the healthy spouse, then the healthy spouse will only be able to protect $109,560 of his or her savings, and all the rest may have to be spent down on the nursing home spouse’s care.

Well, why can’t they just sign a pre-nuptial (pre-marital) agreement? Typically, such an agreement states that each spouse is free to do what they want with the assets they brought into the marriage. Some such agreements even specifically state that neither spouse is legally obligated to pay for the long-term care of the other spouse. Unfortunately, the Medicaid laws of most states simply brush these agreements aside and act as if it were never signed. So, while the pre-nuptial contract is completely enforceable and legal for all other purposes, it is useless for Medicaid planning purposes.

So is there nothing the happy couple can do to protect themselves? Short of staying single and “living in sin,” each partner might consider establishing an irrevocable trust and transferring all but $100,000 into such trust. That way, no matter which spouse goes into the nursing home, only the money outside the trust will be at risk. However, a transfer into such a trust will result in a period of disqualification from Medicaid, so this needs to be approached very carefully.

What about income? Must the at-home spouse (“Community Spouse”) share a portion of his/her income with the nursing home spouse? The good news is that, no, the Community Spouse is not legally required to contribute one dime to the nursing home costs of the other spouse. In fact, if the Community Spouse’s income is very low, the nursing home spouse is able to shift some of his/her income to the Community Spouse before having to pay the nursing home. What is “too low”? This is set out in the federal rules to be below $1,822/month, although this can be as high as $2,739–and sometimes even higher–depending on the financial need of the Community Spouse.

In any event, a word to the wise. As some of my clients say, “It would be so much simpler if we didn’t have any money!”