Volume 2, Issue 6
The Wealth Advisor
Understanding Medicaid Planning Opportunities – For Your Clients and You
The last issue of The Wealth Advisor addressed the significant need for clients to plan for the possibility of disability, and how proper disability planning more often than not involves the coordination of financial and legal solutions. This issue addresses a related and often misunderstood topic, Medicaid planning.
What is Medicaid?
Planning Tip: Medicaid is very different from Medicare. Medicare is health insurance available to all persons over age 65 who qualify for Social Security, as well as those who are under 65 and who the Social Security Administration determines to be disabled. Medicare will not pay for nursing home, assisted living or home health care on a long-term basis. Medicare will only pay for this type of care for up to 100 days, and only for the purpose of providing rehabilitation following a three-day or longer hospital stay.
Unfortunately, with the rising costs of long-term care, many people cannot afford to pay privately for home health care, assisted living, or nursing home care. According to the 2006 Study of the MetLife Mature Market Institute, the national average cost for a private room in a nursing home is over $75,000 annually. The national average cost of in-home care is between $17 and $19 per hour. As noted in a recent Harvard University Study, 69% of single people and 34% of married couples would exhaust their assets after 13 weeks in a nursing home. For those whose assets won’t last 13 weeks – much less the rest of their lives – Medicaid planning becomes an important consideration.
Planning Tip: Most people do not have sufficient assets to pay privately for long-term care. Medicaid planning is most appropriate for these individuals, a growing segment of the population.
What is Medicaid Planning?
Planning Tip: Medicaid planning requires input and a coordinated effort from the client’s legal, financial and tax advisors, all of whom should be knowledgeable in Medicaid planning.
In pre-planning cases, life insurance can provide tremendous planning benefits when implemented correctly. The purchase of a single premium life insurance policy by an irrevocable trust, or subsequent transfer to such a trust, will not only replace a couple’s net worth, it will protect the cash value of that policy from Medicaid. Alternatively, if not owned by an irrevocable trust, the cash value of any life insurance policy will count against the amount of assets a person can keep and still qualify for Medicaid.
For example, assume Mr. and Mrs. Jones, both age 65 and in good health, have $450,000 of assets. At their age, a single premium of $100,000 would buy a second-to-die death benefit of nearly $450,000. If an irrevocable trust owns the policy and neither Mr. or Mrs. Jones have access to the trust assets, after a certain period (most likely 5 years), their entire net worth would be protected from Medicaid, and Mr. and Mrs. Jones would still have $350,000 left to live on. Mr. and Mrs. Jones could transfer more assets to the irrevocable trust, if they desire. In fact, if the couple also purchased a five-year long-term care policy (or a life insurance policy with a long-term care rider), they could protect all of their assets from Medicaid, even with a 5 year look-back period.
Planning Tip: With pre-planning clients, life insurance owned by an irrevocable trust, perhaps combined with long-term care insurance or a long-term care rider, can provide significant Medicaid planning benefits.
For those who choose to plan early, the use of an irrevocable trust combined with life insurance and/or long-term care insurance can provide optimum asset protection for an aging client. When gifting is used as a planning strategy, the person receiving the gift often needs advice on how to invest the money they receive. Thus, Medicaid planning also opens the door for the financial advisor to converse with younger family members about the need for proper planning, including the need for disability insurance and long-term care insurance.
Planning Tip: Medicaid planning can open the door for the financial advisor to begin working with and planning for younger generations, while establishing the need for disability insurance and long-term care insurance.
Medicaid Crisis Planning
For a single person in crisis planning, a plan of partial gifting plus the purchase of a single premium immediate annuity may be appropriate. Keep in mind that any time a Medicaid applicant makes a gift, whether it is to another person or to a trust, Medicaid will impose a penalty based on the size of the gift. The penalty is the equivalent of a waiting period – the larger the gift, the longer a Medicaid applicant must wait to obtain eligibility. Because of the severe penalties for gifting, clients should not undertake this type of strategy without the legal advice of a Medicaid planning attorney.
Planning Tip: Annuities play a crucial role in Medicaid planning, particularly with crisis planning.
Identifying Possible Medicaid Clients
Planning Tip: It is important to take a client’s age, medical needs, monthly expenses and income into consideration to determine whether Medicaid planning is necessary or appropriate.
Sellers Johnson Law • 1 Research Court, Suite 450 • Rockville, Maryland 20850 • (240) 988-5530