It’s called “planned impoverishment.” And Congress wants it stopped.
That means people who give away their wealth or place it in trusts so they can qualify for Medicaid will have to do more careful-not to mention ethical-planning to go on the dole while passing along their wealth.
What motivates people to get their relatives or themselves eligible for Medicaid to pay for long-term health care?
Steve McDaniel, partner in the law firm of Williams, McDaniel & Wolfe, says sometimes it’s an adult child who doesn’t want a parent’s illness to deplete any inheritance. Or it’s a parent who wants to leave his estate to his child, not to the doctors.
Stringent rules passed
Thus the furor over the ethics of the financial maneuvering and Congress’ move to curtail the practice and stanch the flow of funds from the federal Treasury, which bankrolls much of state Medicaid expenses.
Stowed away in a little publicized corner of the federal tax law Congress passed last August are harsh and complex rules to thwart people from making the government, through Medicaid, pay for medical care for those who can afford to pay the charges themselves.
The changes highlight the need for planning, possibly using options such as long-term health-care insurance, advisers say.
“This law legitimately tightens up eligibility,” says Richard Sadler, executive director of the Tennessee Health Care Association, the state’s nursing home industry lobbying group.
Under the new law, the government may look back at your gifts for the 36 months before your Medicaid application and deny eligibility if authorities believe you made the gift to qualify for Medicaid. If the money comes from a trust you set up, the look-back period is five years.
Under the old rules, the government could deny you Medicaid eligibility for up to 30 months. Under the new law, the government can deny your eligibility indefinitely.
In figuring your assets for Medicaid eligibility, your house is not included, says Pam Wright, a Legal Services lawyer. But the new law adds a twist: The federal government requires each state to pass a law allowing the state to recover what it paid in Medicaid benefits from what is left of your estate after you die-including your house.
That may weaken the traditional advice-don’t sell your home-because over the long run you may not be able to pass any wealth tied up in your home to your heirs, McDaniel says. However, that will depend on how tightly states enforce the new property laws and what leverage, such as threats to withhold funds, federal authorities use to get state officials to recover Medicaid costs.
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People who want to shelter wealth from possible medical bills may still try to give it away, the advisers said.
“You can move it more than 36 months before you apply for Medicaid,” says lawyer John Fockler.
Drawbacks to strategy
But there are pitfalls.
“You must totally give away your assets and cut the strings,” says McDaniel. That means the value of those assets may not be used to pay your expenses or otherwise benefit you if you try to qualify for Medicaid.
In many states gift taxes add another element to the mix. In addition, assets that are given away don’t qualify for the so-called stepped-up basis given to inherited assets. For example, a couple bought a home for $12,000 that is worth $80,000. If they give the home to their children, the children would have to pay capital gains tax on the $68,000 increase in value once they sell the home. If the children inherit the home, they pay tax only on any gains made from the day they took over.
You can sidestep those difficulties and buy protection for your assets with a long-term health-care policy, though advisers don’t universally endorse such insurance.
“There are not that many people who can afford it,” says Wright.
You may also cut your costs by purchasing a policy when you are young, Sadler said.
“If people start buying these policies in their 40s or 50s, they’re looking at very reasonable pricing,” he said, perhaps $500 to $600 per year for full daily cost coverage.
Sadler listed several provisions you should look for in a long-term health-care policy:
– Make sure the policy has no limits on the length of time it will pay for your care if you have Alzheimer’s disease.
– Make sure the per day payment rises each year to account for inflation.
– Make sure the policy can’t be canceled for any reason other than lack of payment.
– Watch for artificial barriers to getting payment, such as a three-day hospital stay as a requirement.
– Check on coverage of home care expenses.
You should also check out the insurance company. You want to make sure the company is still there if the time comes for your policy to pay off.