I frequently get calls from people who tell me that they want to put their assets into a trust to protect the assets from Medicaid.  The people who call often tell me that they read somewhere on the Internet that they could put their assets into a trust and qualify for Medicaid assistance.  I become the one that needs to tell them that while the concept is true, the Internet often does not tell the whole story.  I will then talk to them about the timing involved in setting up a trust to protect assets from Medicaid, and I often end up telling most people that it is likely too late to protect assets for their situation.

Most often, those who call me are trying to move assets at just about the same time as their relative is entering a long term care facility and they want to protect assets.  I find it my duty to inform these people of the timing rules involved with moving assets to protect them from Medicaid.  Most often, the 5 year look back period for transferring assets will prevent any true benefit from coming from putting assets into a trust when someone is entering a long term care facility and needs Medicaid in the next few days, weeks, or months.  As a general rule, if someone tries to transfer assets out of their name, and does so within 5 years of applying for Medicaid, then Medicaid will look at the value of the assets transferred, and count those assets against the person.  The person will then be disqualified from getting Medicaid over a penalty period, or a time period where Medicaid thinks those assets could, or should, have been spent on paying for long term care or other medical care.  The 5 year look back period is a huge impediment to Medicaid planning, or at least to short term planning, or “crisis” planning as it is sometimes called.

Crisis Planning is Not the Best Type of Planning

I do not handle Medicaid crisis planning.  I have friends who do this, and I am happy to refer you to those friends, if you need.  I know there are professionals who do handle Medicaid crisis planning, and they usually employ a number of different strategies, such as converting assets into Medicaid compliant annuities, restructuring loans or liens against a house, or moving assets into the name of a spouse.  All of these strategies are legitimate planning tools, they are just not something I do.  Instead, I focus more on longer term time horizons and planning, like planning prior to the 5 year lookback period.  Pre-planning is where I work, not crisis planning.

Pre-planning means you need to start planning as soon as possible, preferably more than 5 years prior to when you might need long term care or Medicaid assistance.  There are some exceptions to the 5 year lookback, which can be helpful and useful, but the exceptions don’t help everyone.  This type of pre-planning often involves an asset protection trust, but you do need to consider the timing of such asset transfers, and the potential drawbacks of using an asset protection trust.  Basically, if you want to pre-plan for long term care, and you are trying to get Medicaid to pay for your care, you probably need to start earlier than you may think.

 

Timing for Pre-Planning For Long Term Care and Medicaid Assistance

Medicaid is the biggest and most prevalent program to pay for long term care for those who cannot afford long term care on their own, but the Medicaid rules for qualifying and using Medicaid are quite stringent.

Medicaid looks at your assets and your income.  Medicaid exempts certain assets, like a house or a car, but even those assets can be picked up and sold to pay back Medicaid for what Medicaid spent on your care through what is known as “estate recovery.”  The assets you have now might be protected from Medicaid while you are alive, but also might be picked up by Medicaid after you die.  If you want to pass your assets on to your children, you need to pre-plan.

Non-exempt assets are capped at $2,000.  So, you need to have $2,000 or less to your name to qualify for Medicaid.  If you try to give away assets to qualify for Medicaid, or sell the assets for less than they are worth, that is where the 5 year look back period comes into play.  Medicaid will say that any transfer of an asset for less than full fair market value in return within the 5 years prior to applying for Medicaid will result in a penalty period of ineligibility for Medicaid commensurate in length with the value of assets transferred.  In other words, if you give away assets in the 5 years before applying for Medicaid, the value of the assets will count against you.  To be fully safe, you want to pre-plan and transfer assets more than 5 years before you need long term care to be paid for by Medicaid.

 

There Are Exceptions to the 5 Year Rule

Not all assets and asset transfers are subject to the 5 year lookback rule.  Asset transfers between spouses are not subject to the 5 year rule, and a transfer of a house to a child who is caring for an aging parent is also an exempt transfer if the child lived with the parent and cared for the parent for at least two years.  The transfer to a child exemption can be narrow, and transfer of assets to a spouse may not be as helpful as you might think.  A spouse who does not need long term care can have $154,140 in assets, while the spouse receiving Medicaid can only have $2,000 or less.  While $154,140 is a lot of money, it is usually not high enough to protect someone’s retirement accounts or life’s savings, so just counting on the spousal exemption may not be the best plan.

 

There Are Alternatives to Medicaid to Pay for Long Term Care

Long term care insurance is available for purchase from properly licensed insurance agents and long term care insurance can be structured as stand alone long term care insurance or as a hybrid for long term care and life insurance policies.  Stand alone long term care insurance is most affordable when purchased at a young age, and hybrid long term care / life insurance has medical and health requirements that must be met, so these types of plans are for the relatively young and healthy.  The younger and healthier you are, the more affordable this type of plan can be.  Pre-planning at a young age is definitely the way to go!  You need to be healthy enough to qualify and young enough for the plan to be affordable.

 

You Can Use an Asset Protection Trust, But You Need Careful Planning

You can certainly set up an asset protection trust to hold assets you want to protect from Medicaid – an irrevocable trust – to keep your assets safe from long term care costs and medical expenses.  As stated above, you ideally want to start this type of planning more than 5 years before you need long term care.  However, you don’t want to start too early.  To get the asset protection of an irrevocable trust, you give up control of your assets.  Often, elderly parents will give control of the assets and the trust to their children, but that is a big concern to setting up a trust.  When is the right time to give up control over assets, and when is that not a good idea?  There is no one correct answer to that question, which makes this type of pre-planning an inexact endeavor.

 

Plan Ahead the Best You Can

Not everyone wants to have Medicaid pay for their long term care, or wants to pre-plan for long term care expenses, which is understandable.  The timing of when to set up a trust and transfer assets is not an exact calculation and pre-planning may not even be needed if someone dies suddenly.  You really end up needing to make your best / educated decisions on the timing and setting up of an asset protection trust at the best time for you.  An experienced estate planning attorney can help you to think about what timing is best for you.  If you want to talk about your situation with an experienced attorney, click the link below.