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!”

Here’s the segment I appeared on:

The overall topic of the hour-long show was on how to pay for the government benefits such as Social Security, Medicare, and Medicaid. Since my book (“How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets”) explains how to save the most possible money by understanding the Medicaid rules, John wanted to explore some of the techniques mentioned in the book and on the website that advertises the book.

My segment was introduced by John saying something like, “Next, how some attorneys are advising people how to cheat the government!” Of course, I would never advise anyone how to cheat the government! Utilizing exemptions that are specifically set forth within the federal law is certainly not cheating. I mentioned on the show that if you go to a tax accountant, you fully expect that you will be advised how to take advantage of every deduction and loophole in the tax code, and that my advice is no different.

John said something like, “Yes, but with saving taxes, you’re keeping more of the money you earned, whereas with Medicaid planning you’re asking the government to pay your bills in the nursing home.” I don’t see a real difference in effect between these two: in both cases you are increasing the burden on taxpayers to pay for government programs. With tax savings, are you “selfish” for trying to keep more of the money you earned, at the expense of increasing everyone else’s taxes?

As the great Judge Learned Hand famously said in the case of Helvering v. Gregory (1934), “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. . . . Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

The United States Supreme Court reinforced this sentiment in affirming the above ruling: “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”

I see no difference in trying to save the money you earned by use of proper and legal planning techniques that are permitted by the federal government, so that part of the burden is shifted to the Medicaid program.

If lawyers had to decide whether such planning techniques best served the overall good of the nation, they would be part of the legislative process, not attorneys who are required by law to be “zealous advocates” for their clients. As I mentioned on the show, there are some attorneys who simply refuse to assist people with this type of planning. But if every attorney did so, then people who are legally entitled to these benefits would be shut out from the very benefits the legislation entitled them to. When a law is passed allowing people to claim a certain benefit, the legislators must certainly assume that some people will actually do so–and that it is not wrong to do so!

Note that in some states, you cannot charge for future care, in a lump sum payment, but in others, it is perfectly legal to do so. Needless to say, you will need an elder law attorney to draft the agreement for you, as the Medicaid rules of your particular state must be carefully followed.

Also, don’t forget there are income tax consequences, so you’ll want to be sure to report the transaction to your accountant.

A number of years go by and your parent has now passed on to a better place, but before you’ve finished grieving you get a letter from the state Medicaid Recovery Unit requesting repayment of every dime they paid out on your parent’s behalf! You’re depressed, angry, confused. You stare at the paper and can’t believe it. “I thought we were all set, that once Mom was on Medicaid we didn’t have to worry about that any more….Can this be correct?” you ask your siblings.

Unfortunately, the answer is “Yes.” What you have just been confronted with is something called Medicaid “estate recovery.” Essentially, it requires repayment of the entire amount of Medicaid benefits that were made during your family member’s stay in the nursing home.

Prior to 1993, such estate recovery was optional—a state could implement it or not. However, in that year a new federal law was passed (known as OBRA ’93) that mandated that every state must seek estate recovery from its Medicaid-receiving residents, following their deaths.

In essence, while you thought you had qualified your family member for a government handout, all you’ve really received is an interest-free loan! And upon your family’s member’s death, the state wants its loan paid back.

Now if you’re sharp, you may be thinking “Wait a minute…if someone qualifies for Medicaid, they have to be essentially broke. So where exactly is this money coming from to repay the state?” That’s a good question, and the good news is that if your family member died owning nothing, then indeed the state is out of luck. It can’t go after the kids’ money. There must be some assets that the nursing home resident had a legal interest in, at the time of death, in order for the state to be repaid.

In many states, the only “legal interest” of a deceased Medicaid recipient that is taken into consideration is the individual’s so-called “probate estate”; that’s an asset that was titled in the sole name of the individual, or as a “tenant in common” if jointly owned. It’s the assets that will pass under a person’s will. For example, something like a joint bank account, stock owned in “TOD” (transfer on death) form, a bank account with a “POD” (pay on death) beneficiary, an annuity interest, and real estate that’s titled as “JTWROS” or “joint tenants with right of survivorship,” are all non-probate assets and therefore protected against the state’s claim for reimbursement.

A number of other states, however, have passed laws that permit recovery against an “expanded definition of estate.” The federal Medicaid laws permit this. Under such an expanded definition “estate” could now include joint property, life estates, living trusts, and any other asset in which the deceased nursing home resident had any legal interest at the time of death. Boy, that makes it tough! This even goes against hundreds of years of common law, but it is legal, and there have been a number of court cases that have backed this up.

Now if you live in one of the “probate estate only” states, you should feel lucky, but remember that at any time your state can revise its laws and go with the broader definition. And your family member will not be “grandfathered in” if he or she received Medicaid benefits before the change in law in your state; there have been court cases that have ruled on this, stating that it’s the law in effect as of the date of death of the Medicaid recipient that counts.

Well, what should you do to plan for this, assuming you can do anything at all? And are there exceptions to this harsh rule? See my other articles on this topic.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).

First of all, in states where recovery of benefits paid (“estate recovery”) is only made by a claim against your probate estate (so-called “probate estate only” states), all you need be sure of is that the Medicaid recipient has no probate estate at death. Thus, the recipient should only own assets in POD, TOD, joint ownership with right of survivorship, annuity, etc., form. This is similar to those “avoid probate” techniques, except that you cannot use a living trust: any asset titled in the name of a living trust will be a “countable” asset for Medicaid purposes, even if it’s ordinarily “non-countable” were it not in the trust.

For example, you can title an automobile in joint names with a child. So the car would be titled as “Mary Smith and John Smith, JTWROS.” John is Mary’s son, and upon Mary’s death, sole title to the car passes automatically to him outside of probate. “JTWROS” stands for “joint tenants with right of survivorship.” (Be sure to check your state’s motor vehicle titling rules to be sure this will work in your state!) Since one car of any value is exempt during Mary’s lifetime, it’s protected during her life and escapes estate recovery on her death.

The same approach can even be taken for her house. Since a Medicaid recipient’s house is normally exempt during lifetime (for an unmarried person, up to between $500,000 and $750,000 of equity value, depending on the state), it’s only at the recipient’s death that there’s a problem. So to avoid the house being included in the parent’s probate estate, once again you can title the house as JTRWOS. CAUTION: Adding another person’s name to the deed is a gift of an interest in the house, effective upon the date of the deed! Thus, when Mary has her attorney add her son John’s name to the deed, she has just made a gift of 50% of the house to him. Although gift tax is rarely an issue, it should be considered. More importantly, though, is that this is a Medicaid-disqualifying transfer, with a large penalty attached. If Mary wants to go this route, she may be unable to apply for Medicaid for five years after she signs the deed.

Also, what if John is sued or divorced? Mary may still think of the entire house as “hers,” but the creditor or divorcing spouse will view that 50% interest in the house as an asset of John’s, and it could be subject to attack. Mary may find herself out on the street if the house has to be sold to satisfy the judgement or divorce settlement.

Some states permit adding another person to the deed by giving them less than 50%, which could reduce the amount of the gift, but that is something only your attorney can determine for you. Sometimes what the rule is for real estate law differs from the rule for Medicaid purposes. So, a word to the wise: be sure that the attorney who is doing the new deed for you is up-to-date on the effect that will have on your Medicaid eligibility!

In my other articles on this topic we’ll look at some other ways to plan for estate recovery.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).

If you were under age 55 at the time you received Medicaid benefits other than nursing home care, then you will be exempt from estate recovery.

If you are survived by a spouse, a child under age 21, or a blind or totally and permanently disabled dependent, you will also be exempt from estate recovery. Technically, the federal law states that recovery can be made “only after the death of the individual’s surviving spouse.” So if, for example, the surviving spouse dies a month after the Medicaid recipient spouse, a state could file a claim for recovery at that time. Many states, however, have taken a more liberal reading of this, and so long as there is a surviving spouse, no recovery will be made, no matter how long or short the surviving spouse lives. Once again, you’ll need to check your state’s own laws to find out which rule applies to your situation.

Notwithstanding the above, even in a state where recovery may be made after the surviving spouse’s death, there typically is an additional limitation that applies to all claims against an estate: all states have a statute of limitations that bars claims against an estate that are made more than a certain number of months after the death. In many states, that limit is one year. So, in a state with this rule, if the surviving spouse dies more than a year after the Medicaid recipient spouse, it will be too late for the state to file its claim for estate recovery.

If a state can only file a claim when there is no child under 21, can they wait until the child attains age 21 and then file their recovery claim? Once again, this must happen within the statute of limitations period, assuming there’s not a blanket exemption if there’s a surviving child under age 21, period.

There will be no recovery made against the exempt home of the Medicaid recipient (i.e., it will not have to be sold to pay back the state) if

1. a sibling of the Medicaid recipient was living in the house for at least one year immediately prior to the date the recipient was admitted to the nursing home and who has continuously lived in the house since then, or
2. if there is a son or daughter (of any age) of the Medicaid recipient who was living in the house for at least two years immediately prior to the date the recipient was admitted to the nursing home, who has continuously lived in the house since then, and who provided care to the Medicaid recipient prior to his or her entering the nursing home which permitted the recipient to delay entering the nursing home.

If all else fails, there’s an exemption against estate recovery if such recovery would work an “undue hardship” on the surviving family members. One example would be where the exempt asset is a working farm, and a forced sale of that farm would throw surviving family members out of work.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).

Another exemption is life insurance owned by you. The rule states that only the “cash surrender value” of a life insurance policy is countable, but only if the total face value of all life insurance policies on your life exceeds $1,500. (“Cash surrender value” is the amount the life insurance company will send you if you canceled the policy. It’s also known as the “cash value.” The “face value” is what the company would pay out to your beneficiaries if you died, assuming the policy was still in effect.)

So if you have a $1,000 policy with cash value of $800, you can keep it and it will not count towards your $2,000/$106,400 limit.

What if you have a term policy with a face value of $100,000? It’s completely exempt since a term policy by definition has no cash value. Of course, you (or another family member) have to pay the premium each year to keep it in force.

What should you do with existing policies? If you have an existing policy and your health is not good, you may decide to keep the policy rather than cancel it. After all, you may be uninsurable, and if you keep the policy in force, your family members could benefit from the proceeds upon your death.

Assuming the total face values exceed $1,500 and your countable assets put you over the limit to qualify for Medicaid, it could be a good idea to have your children purchase the policy from you and keep it in effect (by paying the annual premiums). You see, it’s not who is insured or who is the beneficiary that matters—it’s who is the owner of the policy. The reasoning for this Medicaid rule is that the owner could simply cash in the policy at any time, and thus it is counted the same as if you already did so. But if your child is the owner, you have no ability to cash in or cancel the policy, so it would no longer count against you.

Another option is to assign the policy to a child, as a gift. This will cause a penalty period so in many cases this is not the best solution. However, as part of an overall plan that includes other gifting, it could make sense.

Recently, some companies have advertised single pay, non-cancelable, no cash value “life insurance.” The idea behind these policies is that if there is no cash value, the policy cannot count against you. They are set up with minimal underwriting (i.e., virtually everyone is guaranteed to qualify to buy one), and the beneficiaries are usually the children.

The problem is that if you purchase an asset over which you have no control—you cannot cancel it, cannot get your money back, cannot even change the terms or the beneficiaries—the Medicaid agency may well deem this to be a gift. If that’s the case, you have not accomplished what you thought you had, i.e., converting cash to a non-countable form, so that you did not have to make a gift of the cash. At the present time (2/08), however, several state Medicaid agencies and at least one state court decision have permitted these arrangements, so in some parts of the country, this technique will indeed work as advertised. What about where you live? As usual, check with an experienced elder law attorney in your area to find out the local rules.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).

With a conventional mortgage, you borrow a lump sum of money from a bank or mortgage company and each month you partially repay the loan by writing them a check. Thus, you must set aside cash flow every month to make sure you can make that payment. If you fall behind, you may find your house being foreclosed on by the bank.

With a “reverse mortgage,” however, you receive a check each month from the bank or mortgage company, and you never have to pay them back as long as you live in the house. If the loan is made to a married couple, then no repayment need be made until neither spouse is living in the home.

At that time, the loan is repaid, plus interest. If the family members cannot pay the loan off, the house will be sold. Note, however, that if the amount of the loan exceeds the net proceeds from the sale of the house, the bank is simply out of luck—it cannot come after the family members for the shortfall.

Thus, a reverse mortgage may make sense for you if:

• you find yourself short of cash each month
• you would like to make lifetime gifts to your children or grandchildren and don’t have the cash to do so
• you would like to have medical treatment not covered by Medicare or your health plan
• you’d love to go on an extended vacation
• your spouse must move into assisted living
• you like the idea of drawing down some of the equity in your house without having to repay the loan during your lifetime, so long as you are living in your house

The amount you can borrow depends on your age, the value of your house, and the current interest rate. The older you are, the more you can borrow, since your life expectancy is shorter and the bank won’t have to wait as long to get repaid. Also, as interest rates rise, the amount you can borrow decreases.

However, it rarely makes sense for a single person who may soon need nursing home care to obtain a reverse mortgage, because as soon as they move out of the house, the loan will have to be repaid. That will cause the house to be sold, exposing the cash that had been protected by the home exemption. Then you have to figure out what to do with that cash so that the person qualifies for Medicaid!

If one spouse is in the nursing home and the other spouse remains at home, a reverse mortgage could indeed give additional income to the healthy spouse. In this case, the monthly payments are not actually counted as income under the Medicaid rules, which is good, since that could allow some of the nursing home spouse’s income to be shifted over to the healthy spouse.

No decision about obtaining a reverse mortgage should be made without a consultation with a knowledgeable reverse mortgage specialist or financial planner. It’s also a good idea to check with an elder law attorney before you sign on the dotted line, to make sure the plan still makes sense if you and/or your spouse will need nursing home care in the not too distant future.

For more information on reverse mortgages, take a look at the information provided by the Federal Trade Commission (www.ftc.gov/bcp/conline/pubs/homes/rms.htm) or the AARP (www.aarp.org/money/revmort). See how much you can borrow by entering your info into this useful online calculator: www.rmaarp.com.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).

First, the facts of your neighbor’s situation are surely different from yours, in ways you may not realize even matter. For example, the income of your neighbor’s parent, cost of the nursing home in question, his parent’s health and life expectancy, may all differ from that of your situation. Yet each of these factors will most likely change what is advisable to do or suggest alternative approaches to an experienced elder law attorney who regularly advises about Medicaid issues.

Second, the laws change frequently. So even if your situation were exactly the same as that of your neighbor, the rules of the game may have changed in the months or years since your neighbor’s advice made sense. For example, when Congress passed the Deficit Reduction Act of 2005 on February 8, 2006, the “lookback period” (which penalized gifts that were made a certain number of months before a Medicaid application) was extended from 36 to 60 months. Applying even one month too soon, following a large gift, could have disastrous financial consequences. It pays to know the rules!

Third, your family situation may differ from your neighbor’s in ways he may not be aware of, and even if he were aware of, he may not realize the importance of such a situation: there may be safe-harbors and exclusions that apply to your particular family situation that your neighbor may not have heard of. For example, you may have a sibling who is “disabled” as defined by the Social Security Administration: one exception to the general rule that making a gift causes a period of disqualification from Medicaid benefits, is making that gift to a trust for the benefit of a disabled child (of any age).

Fourth, most people don’t realize the major differences from state to state in many of the Medicaid rules. Although the basic framework for the entire Medicaid program is set by the federal government, with many of the rules required to be the same in every state, there are also many sections of the Medicaid law that allow each state to set its own rules, within certain limits. So what may have worked for your neighbor’s mother in Florida won’t fly in Colorado.

Fifth, the “imaginative” asset shifting technique your neighbor’s mother utilized may indeed have “worked”—that one time, with that one caseworker. That is certainly no guarantee that your parent will be so lucky with the same technique. You may not want to risk the consequences of such a technique failing; your attorney can help you assess the risks and together you can make an informed decision.

As you can see, this is an area fraught with complications. Asking your neighbor’s advice about the best computer or car to buy is one thing, but you proceed at your own peril if you rely on the neighbor for Medicaid planning!

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).

But what happened in the NJ caase is that the spouse in the nursing home did not elect against the deceased husband’s will. The husband left all of his property into a trust for the wife’s benefit, with distributions to go to the wife in the discretion of the trustee. That might be good, but maybe not as good as getting 1/3 of the property outright!

Under the Medicaid rules, if a person does not take advantage of a legal right to access funds, it’s treated as if the person did access the funds and then made a gift of the funds to the actual recipients of the property. So in this case, the failure of the surviving wife to elect her 1/3 “statutory share” interest in her deceased husband’s estate was treated as a gift by the wife to the children. Such a gift causes the wife to be ineligible for Medicaid coverage for some period of time. The length of time she’s penalized for the deemed gift depends on the value of the estate she did not get.

Although the attorney for the wife argued that in fact the wife’s lifetime interest in 100% of the husband’s property was worth more than 1/3 of the same property outright, the court did not buy that. The court ruled that the test is whether the wife could have made the election, not whether such election was advisable.

So what should the couple have done to avoid this? One possible solution is to leave the minimum amount necessary to satisfy the wife’s elective share to her, outright, and then leave the balance either to the children or in a trust for the wife’s benefit. She would still be disqualified from Medicaid for a certain period of time after the husband’s death because she’d have too much money to qualify.

However, once she got the money, she could implement some of the planning ideas discussed in this blog. For instance, typically she could protect at least half of that money, i.e., 1/6 of the husband’s estate. That’s a lot better than being deemed to have a made a gift of the entire 1/3 elective share, which would cause the wife to be disqualified from Medicaid benefits for twice as long.

Now if you’re really clever, you may have thought, “They should have had a pre-nuptial agreement and that would have solved their problem!” Unfortunately, while such agreements are completely legal in most states, the Medicaid rules simply ignore both pre- and post-nuptial agreements. So once again it’s important to get the advice of an attorney who understands the ins and outs of the complicated Medicaid rules, if Medicaid coverage of nursing home expenses may ever become necessary.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).