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5 Reasons to Downsize Your Estate for Medicaid Planning

Downsize Your Estate for Medicaid

It is common knowledge among professionals in the estate planning world that to downsize your estate may be an important part of limiting your federal estate tax exposure.  This can be done through “gifting” to individuals and other entities, such as irrevocable trusts, or pursuing other “spend down” strategies. However, professionals aren’t always aware of the benefits and possible need to downsize your estate for Medicaid planning purposes.

Medicaid planning involves planning for long term Medicaid eligibility.  The extremely high cost of long term medical care actually impacts many more estates than the estate tax issue because of the increases in the federal estate tax exemption, which is $5,430,000 for singles and just a tad over $10,800,000 for married couples.   Planning to preserve as much of the estate while accommodating the cost of long term medical care is the focus of this article.

5 Reasons to Reduce Your Estate for Medicaid Planning 

 1.  Downsizing your estate for Medicaid is an important consideration in Florida because Medicaid is a “means tested” program that limits your allowable assets and income. 

When thinking about downsizing an estate, most of the time, estate planning professionals are thinking about limiting federal estate tax planning.  However, we are in an age when the Baby Boomers are aging and thus requiring long term “skilled nursing” care, and these costs can be staggering.  Transfers of assets out of the estate can in many cases literally salvage the remaining estate.  Gifting can be a great strategy for both tax planning and Medicaid planning purposes and currently $14,000 (per spouse) may be gifted to as many beneficiaries as desired.  Of course any transfers, including those allowed for tax purposes are still subject to the “look back” period for Medicaid as discussed below.

2.  With average monthly costs of skilled nursing care ranging betwee $5,000 and $10,000 per month, an estate can be depleted quickly and this can be avoided with proposal spousal planning and gifting strategies. 

Without a plan, an aging couple will be required to “spend down” an estate in order to qualify an ill spouse for Medicaid assistance.  However, many people do not know that there are laws for spousal Medicaid planning in Florida to protect the estate for the benefit of the well spouse while allowing an ill spouse to get qualified.   Currently, there is no penalty if one spouse “transfers” assets to another spouse for Medicaid purposes.  However, for an ill spouse to qualify for Medicaid, Medicaid only allows the “Community Spouse” to keep an “exempt” assets as well as approximately $116,000 (currently) in other assets.  So, a common approach is to allocate the spending of any additional funds toward improving any exempt assets such as the marital homestead.  Additionally, assets such as IRAs might not be considered a countable asset, and there are other strategies such as Personal Service Contracts, Promissory Notes and special annuities that may be considered to preserve as much of the estate as possible.

3.  It is important to consider timing, the look back period and penalties when considering downsizing your estate for Medicaid as part of an overall estate plan.  

The “look back period for Medicaid is currently 5 years in most States, such as Florida, and other States like California are still holding at 3 years based upon the prior applicable laws.  This means that “Transfers” to individuals or entities such as Irrevocable Income Only Trusts can keep assets in the family so to speak if transfers are made prior to the look back period.  So, in most states, after 5 years a transfer will not impact Medicaid eligibility and if a transfer was made within the lookback period, a penalty would be assessed based upon the value of the asset transferred divided by the average monthly cost of care.  So, as an example, if the fair market value of the asset transferred was $100,000 and the average cost of care in the State is $10,000, then the penalty period for Medicaid benefits would be 10 months.

4.  Transfers to a joint revocable living trust established by both spouses will not be effective to downsize your estate for Medicaid. 

When considering “transfers” of assets between spouses, for purposes of starting the clock on the look back period, transferring assets to a Joint Revocable Trust is really not a transfer, even if only one of the spouses is the Trustee.  To make it effective, the well spouse must take title, either individually or in his/her own revocable living trust.

5.  There is an element of fortune telling when deciding whether to downsize your estate for Medicaid, so even good strategies can encounter challenges.  

In the above strategy, as well as gifting and other strategies, there is always an element of fortune telling in this kind of planning.  For this reason, sometimes it is a difficult determination whether to transfer assets to a “well spouse”, especially if that spouse has some health problems also, or if we are dealing with a second marriage with children from a first marriage.  All of these issues must be considered and carefully “weighed” by an experienced elder law attorney prior to making moves because every move carries potential consequences.

As always, these are all general principles that may or may not be advisable based upon one’s unique circumstances.

Steve Gibbs, Esq.

This is an updated version of an original post dated February 25, 2016. 

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