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Medicaid Planning Goals and Strategies, Part One

Medicaid Planning Goals and Strategies

Why is Medicaid planning important?

Aging is inevitable, and a gradual (or not so gradual) inability to function independently is a great concern for many people. While the prospect of entering a nursing home is a daunting one, equally frightening is the expense of nursing home care. Although purchasing long-term care insurance might be the most logical move, not everyone can afford the cost of its premiums. Many people feel that their only option is to spend down their life savings in order to private-pay nursing home care. Once this money has been exhausted, they'll apply for Medicaid. But this isn't the way it has to be. To qualify for Medicaid, both your income and the value of your assets must fall below certain limits, which vary from state to state. In determining your eligibility for Medicaid, a state may count only the income and assets that are legally available to you for paying your bills. Consequently, a number of tools have arisen to facilitate Medicaid qualification.

What are the goals of Medicaid planning?

Medicaid planning serves to accomplish a number of goals: (1) qualifying for Medicaid, (2) exchanging "countable" assets for exempt assets, (3) preserving assets (including the family home) for loved ones, and (4) protecting the healthy spouse (if any).

Qualifying for Medicaid

Qualifying for Medicaid is not automatic; your income and asset levels must fall below the threshold set by your state. However, a state may consider only the income and assets that are legally available to you for paying your bills. Medicaid planning helps you to qualify for Medicaid.

Exchanging countable assets for exempt assets

The term countable assets refers to anything valuable you own that is not exempt by law or otherwise made inaccessible; the total value of your countable assets (together with your nonexempt income) will determine your eligibility for Medicaid. Under federal guidelines, each state composes a list of exempt assets. It is possible, therefore, to rearrange your finances so that countable assets are exchanged for exempt assets (or otherwise made inaccessible to the state).

Preserving assets (including the family home) for loved ones

Why are so many people averse to simply liquidating their assets to pay for nursing home care? After all, Medicaid will eventually step in (in most states), once you've exhausted your personal resources. The reason is simple: People want to financially assist their loved ones. After working long hours for many years, over the course of a lifetime, most people don't want to see their nest eggs vanish; rather, they want to be able to pass something down to their loved ones. And this can be particularly true with respect to the family home, which is often the single largest asset a nursing home resident might own.

Protecting the healthy spouse (if any)

With respect to a married couple, financial protection of the healthy or at-home spouse is always an important concern. A married couple's assets are pooled together when the state is considering the eligibility of one spouse for Medicaid. The healthy spouse is entitled to keep a spousal resource allowance, which generally amounts to one-half of the assets (not to exceed $120,900 in 2017). This really isn't much money, especially if the healthy spouse is a younger woman (who'll probably live much longer anyway because of her gender). Medicaid planning seeks to financially assist the healthy spouse.

What are the primary tools and strategies for attaining these goals?

Purchase of exempt assets

It has become standard practice for a Medicaid applicant to use countable resources to purchase exempt assets. Exempt assets are those that do not affect your eligibility for Medicaid; each state composes a list of exempt assets, based on federal guidelines. Typically, this list may include such items as a family home, prepaid burial plots and contracts, one automobile, and term life insurance.

Instead of spending your money solely on nursing home bills, therefore, you can pay off the mortgage on your family home, make home improvements and repairs, pay off your debts, purchase a car for your healthy spouse, and prepay burial expenses.

Caution: In 2017, a family home with equity above $560,000 (or $840,000 if increased by your state) makes you ineligible for Medicaid. An exception applies if your spouse, child under age 21, or child who is blind or disabled resides in the home.

Using immediate annuities to convert countable assets into an income stream

A healthy spouse may want to take jointly owned, countable assets to purchase a single premium immediate annuity that is Medicaid-compliant for the benefit of himself or herself alone. You convert countable assets into an income stream. This is beneficial, since each spouse is entitled to keep all of his or her own income. (This stands in contrast to the treatment of assets, whereby all assets of a married couple are pooled together and totaled.) By purchasing an immediate annuity in this manner, the institutionalized spouse can qualify more easily for Medicaid, and the healthy spouse can enjoy a higher standard of living.

Caution: Generally, for annuities purchased on or after February 8, 2006 (this date may be slightly different in your state), the annuity will be counted as an asset unless the state is named as the primary beneficiary (unless the beneficiary is your spouse or minor or disabled child), in which case the state must be named as the secondary beneficiary. There is an exception for annuities held within a retirement plan. Further, any interest you have in an annuity must be disclosed at the time you apply for Medicaid.

Transfer of assets under "reverse half-a-loaf"

Prior to the enactment of the Deficit Reduction Act of 2005 (the Act), the "half-a-loaf" strategy was often used to preserve assets and facilitate eligibility for Medicaid. Basically, you would give approximately one-half of your assets away (to loved ones) in order to preserve those assets; you used the remaining money to pay for your nursing home care during the period of ineligibility for Medicaid caused by the transfer. This strategy worked because the period of ineligibility was triggered when the transfer was made. Under the Act, the period of ineligibility now starts when you apply for benefits, effectively eliminating the half-a-loaf strategy in most cases.

But since the enactment of the Deficit Reduction Act, a strategy referred to as "reverse half-a-loaf" is being used. With a reverse half-a-loaf, you transfer assets to loved ones in an amount that will qualify you for Medicaid in the same month that you apply for benefits. Due to this transfer, a period of ineligibility will apply. You then purchase an annuity or a promissory note that will "cure the transfer" by having a portion of the transfer returned, which shortens the eligibility period.

Caution: The reverse half-a-loaf strategy is not permitted in all states. It will not work in states that do not allow partial cures. An attorney or advisor who is experienced with Medicaid planning can give you more information about the rules in your state.


An irrevocable trust can help you to qualify for Medicaid and preserve assets for your loved ones; it serves to shelter your assets (and/or income), making them unavailable to you. The state Medicaid authorities cannot consider assets that are truly inaccessible to the Medicaid applicant; therefore, anything that stays in an irrevocable trust will lie outside of your financial picture, for Medicaid eligibility purposes.

Although a number of trusts have been devised by Medicaid planning attorneys, four have received particular note and the most widespread acceptance: (1) irrevocable income-only trusts, (2) irrevocable trusts (in which the creator of the trust is not a beneficiary), (3) Miller trusts, and (4) special needs trusts.

Preservation of principal residence through outright transfers, life estates, special powers of appointment, and transfers into trust

For many people, a house is generally the most valuable and important asset they own. Not only does it have sentimental value, but it is sometimes the only means of passing down some financial security to children or other loved ones. However, the skyrocketing cost of nursing home bills can jeopardize your ability to preserve your house. Additionally, a state may be entitled to seek reimbursement for Medicaid payments by, in some cases, placing a lien on your principal residence.

However, utilizing certain Medicaid planning techniques may help you preserve your home for your loved ones:

  • Outright transfers (gift of the home)--Making a gift of your home to your children protects this asset for them; the state cannot place a lien (or force a sale) on a home that no longer belongs to you and is not part of your estate.
  • Transfer subject to life estate--With this planning tool, you transfer the remainder interest in your house to your loved ones, and you keep a life estate for yourself. You have the legal right to live in the house, and when you die, your loved ones will own the home automatically.
  • Transfer subject to special power of appointment--Here, you transfer your house to someone else but reserve the right to later redirect the ownership of the house to a different person. Since the house no longer belongs to you, the state cannot place a lien (or force a sale) on it. And this tool provides you with tax advantages as well.
  • Transfer in trust--From a Medicaid perspective, the most effective form of trust for protecting your principal residence would be the irrevocable income-only trust. It can facilitate your Medicaid eligibility and remove the house from your probate estate, protecting it from a Medicaid-forced sale in some states.

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 Securities, insurance products, and investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC. Additional insurance services offered through SGM Agency, LLC. Smith, Moses & Company, LLC and SGM Agency LLC are not affiliated with FSC Securities Corp.

This communication is strictly intended for individuals residing in the state(s) of AK, AZ, AR, CA, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KY, MA, MI, MO, NH, NY, NC, ND, OH, OR, PA, SC, TN, TX, UT, VA, WA, WV and WI. No offers may be made or accepted from any resident outside the specific states referenced.

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