When folks are doing estate planning in Florida, they often are trying to take care of those they love the most, and this is one of my favorite things being a Florida estate planning attorney. However, many don’t realize that their generosity can backfire if they fail to consider the relative circumstances of those loved ones on the receiving side – this is especially common with “self help” DIY estate planning. One such circumstance concerns how an inheritance can jeopardize Medicaid eligibility or create penalties.
As I’ve written in the past, a lump sum payment or a gifted asset coming from an estate can jeopardize need based SSI special needs disability benefits. This same concept applies to other areas of Florida Medicaid with most impact in the area of long term skilled nursing benefits for chronic conditions.
One would think that simply declining the gift would preserve the benefits, and yet this isn’t the case because penalties can apply. However, there are ways to plan so that the maximum benefits are obtained from the gift and penalties can be avoided.
Estate Bequests, Disclaimers and Medicaid Penalties
A Bequest From An Estate To Someone On Medicaid Cannot Be Simply “Disclaimed” Because A Medicaid Penalty Will Apply.
By definition, filing what is known as a Qualified Disclaimer (“disclaimer”) is what an estate beneficiary does when he or she does not wish to claim an inheritance share. Sometimes, a disclaimer can be beneficial for estate tax purposes or to avoid the claims of creditors against that beneficiary. So, one would think that a beneficiary who is currently receiving Medicaid assistance or seeking to qualify could just disclaim his or her inheritance. Prior to 1993, that was exactly the case.
Since the pass of the OBRA (Federal Omnibus Reconciliation Act) in 1993, the disclaimer of an inheritance has been deemed a “disqualifying transfer” under the Medicaid Rules and this results in a penalty for the Medicaid recipient. The length of the penalty and the amount will vary based upon the amount of transfer and the local “State” laws because each state is allowed to divide the “sum” of the transfer by the average cost of care in the State. Worse yet, many states after 1993 began imposing a penalty for the disclaimant’ s spouse also under the theory that the inheritance assets would have been available to repay Medicaid for costs expended.
So, this concern applies to families who receive inheritances, and especially to spouses who become qualified for Medicaid and then experience the death of a spouse with assets.
Spousal Disclaimers of Inheritances and Medicaid Penalties
In Many States, A Spouse Cannot Disinherit the Other Spouse and For This Reason A Disclaimer By A Spouse On Medicaid Will Likely Fail.
Interestingly, the problem of not being able to disinherit a spouse has resulted in a fair amount of hand wringing among elder law attorneys in Florida and other states.
The solution to keep from having to “spend down” the entire estate is most often to allocate a certain percentage of the estate to the surviving spouse in a special trust of some type. In most common law states, the spouse who cannot be disinherited may claim what is called an “elective share” of the estate. Cases have shown that Medicaid may attempt to penalize the spouse based upon the elective share amount.
Using Testamentary Special Needs Trust for Medicaid Planning
For Beneficiaries On Medicaid, A Bequest To A Testamentary Special Needs Trust May A Solid Alternative.
For a spouse on Medicaid or a non-spousal beneficiary such as an adult child, that share of the estate can be allocated to a Testamentary Special Needs Trust of some type. For a spousal beneficiary, the amount allocated should probably be calculated to represent the “elective share amount”. The nature of the spousal trust could be what is called an “income only trust” or it could be a “special needs trust” and the preferred type varies among elder law attorneys. For a non-spouse, a special needs trust prepared with the appropriate qualifying provisions can be an effective strategy to avoid the penalty, especially, in my opinion, for non-spousal beneficiaries under age 65 who are receiving SSI/Medicaid.
Steve Gibbs, Esq.
This is an updated version of an original article dated May 10, 2016.