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Medicaid Planning Goals and Strategies, Part Two

Durable power of attorney

Your possible incapacity in the future should be a concern. If you become mentally incompetent before you enter a nursing home, it may be very difficult (if not impossible) to effect a transfer of your assets. A durable power of attorney is a written instrument you sign, authorizing someone else to act for you in the event that you become incapacitated. That way, for example, a wife can transfer the family home out of her husband's name and into her own even after her husband becomes too ill to manage his own affairs.

How does long-term care insurance factor in?

Because Medicare and other forms of health insurance do not pay for custodial care (assistance with daily activities), many nursing home residents have only three alternatives for paying their nursing home bills: cash, Medicaid, and long-term care insurance (LTCI). By purchasing LTCI while you are still healthy, you can hold onto the bulk of your assets for as long as possible--there is no need for you to divest yourself of assets through trusts and other planning tools years ahead of time. Since your insurance will subsidize your nursing home bills during your first few years, you can transfer assets to your loved ones after you enter a nursing home. Any Medicaid ineligibility period created by your transfer of assets will be harmless; your insurance company will pay your bills during that time period.

On the downside, the insurance premiums might be too expensive for a person of modest means. You must consider not only whether you can afford the premiums now but also whether you'll be able to continue paying the premiums in the future (when your income might be substantially decreased).

Tip: All 50 states are permitted to participate in the Long-Term Care Partnership Program. The Partnership Program combines private LTC insurance with Medicaid. Those who purchase LTC insurance through the program receive certain benefits such as the ability to protect some or all of their assets from the "spend down" requirements of the eligibility process.

What are the drawbacks to Medicaid planning?

Medicaid planning can involve certain risks and drawbacks. In particular, you need to be aware of "look-back" periods and possible disqualification for Medicaid, and adverse tax consequences. Because the Medicaid transfer rules have been tightened in recent years (and may continue to contract in the years ahead), you should consult with an attorney experienced with Medicaid planning.

Look-back period

When you apply for Medicaid, the state has the right to review or look back at your finances (and those of your spouse) for a period of months before the date you applied for assistance. For transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), the look-back period is 60 months.

Certain transfers of countable assets for less than fair market value, made during the look-back period, will result in a waiting period or period of ineligibility before you can start to collect Medicaid benefits. The formula for determining the waiting period may be explained as the fair market value of the transferred assets divided by what Medicaid determines to be the average monthly cost of nursing homes in your locale, the quotient representing the number of months for which you will be ineligible for certain Medicaid benefits.

Example(s): Assume that Ralph used $288,000 to create an irrevocable trust, naming himself as beneficiary and his friend as trustee. Ralph entered a nursing home two years later at the rate of $6,000 per month (which is the average in his locale) and applied for Medicaid. But because Ralph transferred assets to an irrevocable trust during the look-back period (60 months), he will be ineligible to receive Medicaid benefits for 48 months ($288,000 divided by $6,000 equals 48 months).

It is possible; therefore, that engaging in Medicaid planning can actually cause you to become ineligible for Medicaid for a time.

Adverse tax consequences

If you give away your assets during your lifetime, the recipients (beneficiaries) will step into your shoes in a tax sense--they'll get the same tax basis in the assets that you had possessed. That can be a drawback, since your holding onto the assets until death would provide the recipients with a stepped-up basis; that is, the fair market value of the assets on your date of death would become the tax basis for your beneficiaries. Nevertheless, certain Medicaid planning tools can preserve the stepped-up basis, even when you effect lifetime transfers. It is important, therefore, to evaluate your Medicaid planning strategies from all perspectives, including a tax viewpoint. What may be the most wise decision from a Medicaid standpoint might be a poor move from a tax standpoint. (Tools that won't prevent the ultimate recipients of your assets from getting a stepped-up tax basis upon your death include transfer subject to life estate, transfer subject to special power of appointment, and transfer in trust.) For more information, consult a financial professional or an elder law attorney experienced with Medicaid planning.

Content provided by Broadridge Communications.

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