Medicaid Asset Protection Planning

The tax season is fast approaching. During this time, seniors often ask if they can include their Medicaid asset protection in their current tax strategies. In 2005, the Tax Reduction Act included provisions that address transfers of assets made by seniors. Under new laws, all seniors who are applying for Medicaid to cover the cost of a nursing home must spend down their assets. There is currently a period of five years in which these assets cannot be repositioned or transferred without incurring some Medicaid penalty. This is referred to as the look-back time. The new provisions also state that all marital assets must be spent down. This means that if your spouse gets sick and needs to be placed in a nursing home, you will be left with no resources on which to live.

When it comes to Medicaid asset protection planning, seniors sometimes question whether they should transfer all of their assets to their children. This can be done, but it is a high risk. If something happens to your children, such as divorce or law suit, they may make use of your assets to help their own situation. At an average rate of over 50% who are ending up in divorce this is a high risk indeed. There are far too many risks in doing this, so it is not a recommended way to reposition your assets. In addition, there are some tax issues to consider when transferring assets to your children. You will be responsible for paying any gift tax if the assets were transferred at less than the fair market value. No matter how you transfer your assets, if the act is done within the five year look-back period, it may be considered fraudulent conveyance.

While there are many options, seniors have to carefully choose which method of asset protection will actually protect their assets. Regardless of the type of method chosen, any transfer of assets must be done at fair market value. This means that if you transfer your home assets to your child, or if you sell it outright, you must first get an appraisal. This will determine what the fair market value really is. If it is found that you have transferred assets below this value, you will be hit with taxes, which could create another problem in addition to the major asset protection concern.

Some seniors think any trust will work, but this is not true. If the assets are placed in a revocable trust, there are strings attached. The asset owner still retains ownership and therefore, the government can demand a spend down. There is no way to protect your assets using a revocable trust. The safest method to do this is to utilize an irrevocable trust such as the UltraTrust®. This type of trust uses an independent trustee, someone who is not related by blood or marriage. The trustee will then manage all of the assets. Their primary focus should be on the well-being and benefit of the beneficiary. An irrevocable trust is the transfer of assets to another person. This means that the asset owner will no longer own those assets, leaving them nothing. This is the only way to avoid losing your assets and being forced to spend down before entering the nursing home by Medicaid rules.

Medicaid asset protection takes some serious planning. You never know when an illness will strike, so it is always best to prepare as soon as possible. Seniors often have a hard time giving up ownership of their assets, but when it comes to the need for Medicaid coverage to pay for a nursing home; this may be the only choice available.