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Peterson: So, it's important to know what Medicaid is. Medicaid is different than Medicare.
Meador: Right.
Peterson: Medicaid is a need-based, basically welfare program. That's what it's entitled.
That's what it really is. It's a need-based welfare program. So, in order to qualify for
Medicaid, every state has a regime that they had to put together a Medicaid program for
the federal government. So, in most states, what you have to do is you have to meet two
tests in order to qualify for Medicaid. You have to meet an asset test and you have to
meet an income test. So, you're assets have to be below a certain level, and your income
has to be below a certain level, and if you fail either test, then you're disqualified
from Medicaid.
Medicaid will pay for long-term care, which is different from what Medicare does. Now,
when you look at the assets and the income test, every state is going to be slightly
different, right, because incomes in Texas look a lot different than incomes in California.
Meador: Right.
Peterson: Incomes in Mississippi are very different than incomes in New York City, right?
So each state kind of set up a test. So, generally in Texas, what you're looking at from an asset
test is for an individual to qualify for Medicaid, they've got to have countable assets of less
than $2000, and so the question is what's a countable asset versus a non-countable asset.
Basically, the non-countable assets, the ones that they're going to exclude from the calculation
is your home, your car, and a pre-paid funeral plan. So, those are the assets that you can
exclude, but everything else is generally going to be counted.
Now, there is what's called spousal impoverishment, and so with spousal impoverishment, basically
even if you're married and only you're applying, you still have to list the assets for your
spouse, so they'll let your spouse keep more money so they don't have to be impoverished
in order for you to get care. Right now, that impoverishment figure in Texas is about $116,000.
The income test looks at what is your monthly income, what's coming in. It counts social
security, it counts any distributions that you're getting from your retirement accounts,
if you've got rental property, it counts the income from your rental property, whatever
comes in on income. In most states, and Texas is included in this, if your client only has
social security and that's the only form of income that they have, they're generally going
to qualify under the income test.
Like I said, you've got to pass both tests. If you pass both tests, you can qualify for
Medicaid. If you fail either test, then no Medicaid for you.
Meador: Well then, that brings up the question, what happens if you fail, let's say the asset
test?
Peterson: If you fail the asset test, generally what you're going to have to do, is you're
going to have to spend your assets down to the point where you qualify. So, we talked
about, you'd be hitting that retirement account to the point where you've got down under your
asset values in order to qualify.
One of the ways that people often will try to qualify because they have not talked to
an attorney about this is they will give stuff away. Giving stuff away doesn't work. So,
generally what's going to happen when you make a Medicaid application, Medicaid is going
to circle that date on the calendar, and that's going to be the start data, and they apply
what's called a look back period. So, they're going to look back at your financial transactions
over the last 60 months, the last five years, and they're going to see what you did over
that five-year time period to see if you tried to get on Medicaid.
Let's take an example. So, you had $300,000, you gave it to your daughter, and then you
applied for Medicaid the next day. When you list that on the application, and you better
list that on the application, because it's a criminal offense to lie on a federal application,
right? You list it on the application, you say, "I gave away $300000 and I did it yesterday."
Guess what, you're not going to pass Medicaid.
What they do, is they will either fail you under the asset test, or they will give you
a period of ineligibility, so they'll say, "Well, you meet the asset test, but you made
these gifts during the look back period, and those are monies you could have spent on your
care. So we're going to calculate what your care costs on a per day basis, and we're going
to divide it into the $300,000 that you gave away to your daughter, and we're going to
come out with how many days you're ineligible."
So, in that example, let's say that care costs you $300 a day. You gave away $300000, they
divide it out, you're a thousand days not eligible for Medicaid. Now, here's the problem
with that, right? How are you going to pay for the long-term care now? Because you're
ineligible for more than three years, right?
Meador: Right.
Peterson: Well, you better hope that your daughter steps in, because she got your $300,000.
Meador: Right. She doesn't even have to stay there anymore. She can be in another country
if she wants to be.
Peterson: Right, she moved to Bora Bora and she's drinking Mai Tais and you're trying
to figure out how to make ends meet during your thousand days that you're ineligible.
Meador: Exactly.
Peterson: So, it's a big problem. Lots of people try to gain the system with gifting,
and it doesn't work too well. Now, one of the things that you'll often see, or that
I see, I've got a client right now that mom gave away, deeded over a property four and
a half years ago, and mom's now needing long-term care. They're thinking about applying for
Medicaid.
So, I looked at the Medicaid application, they sent it to my office, I checked it over,
and I noticed, "Hey, we're taking this in March. In May is when the gift was made."
So, I just told the family, "Just wait and apply after that May data, and then it doesn't
have to be listed on the application anymore, you're not doing anything wrong, because you're
answering honestly about when those things occurred, and it's not going to raise the
red flag, or cause a period of ineligibility."
So, a lot of times, if you think you're going to fail the asset test, especially for gifts
that you made a while ago, what you're going to want to do is maybe pay for a few months
of care, or have the kids pay for a few months of care, and then you apply after that gift
was made.
Meador: Right.
Peterson: So, that's one way you can do it. If you plan in advance, you can also plan,
if you think you're going to need long-term care at some point in the future, you can
actually use an irrevocable trust to transfer assets from you to the trust with the idea
that eventually you'll qualify for Medicaid.
Meador: Right.
Peterson: So, that can also be a method that you use to plan in advance for long-term care.
Meador: What about the income test, if you fail that?
Peterson: If you fail the income test, there's a little type of trust called a qualified
income trust, but it's referred to as a Miller trust, and what the Miller trust does is,
it reduced your income for purposes of qualifying for Medicaid. That's the whole point of the
trust. So, what you do, is you set up this irrevocable trust, somebody else is the trustee
of it, and usually it's an adult child, and you take all of mom's income, and as it comes
into her bank account, you transfer it all over to the trust bank account, and she'll
qualify for Medicaid. Medicaid will decide how much of that income, usually it's all
of it gets used, but Medicaid will fill the gap.
So, what Medicaid will do is it will say, "Okay, well your cost of care is $5000 a month,
you're bringing in $3000 a month, and so what we're going to do is we'll pay the $2000 a
month and then you pay the nursing home the $3000 a month that's in the Miller trust.
That can be a huge benefit to families.
We did one a couple weeks ago, and the reason we did it, is there's a daughter who approached
me, and she said "Mom needs long-term care," but mom literally, her income was $217 a month
too high. Now, when you think about what incomes that we're talking about, she has care that's
basically a $5000 a month facility. It's like $4800 a month.
So, she's $217 to high, so she doesn't qualify, but she qualifies under the asset test, so
she's only failing under the income test. Well, mom has no way to make up the difference.
She needs long-term care. She can't go get a job to make up the difference. There's no
vehicle for her to be able to pay for her care. So, who's paying for her care? Her daughter,
right?
Meador: Right.
Peterson: So, it falls on her daughter to pay the difference right now. Here's the problem,
so daughter and son-in-law work, they have two kids in college, until she went into long-term
care, mom was actually living with them. Well, they have a third child, and that child has
Down's syndrome.
Meador: Oh, good grief.
Peterson: So, can you imagine the financial burden for them to pick up a $4000 a month
additional expense. They already have two kids in college. They have a third child that
has extra needs that are over and above what a normal child would have, right?
Meador: Right.
Peterson: They're both already working, so they're making ends meet. They're doing everything
they can possibly do. So, when you look at the Miller trust, it's really about relieving
that burden off of the family members, and shifting that burden back onto public assistance,
because in this case, it's just killing the family.
Meador: Right.
Peterson: And it's killing the family finances, and it threatens the ability for them to continue
on with paying for college and all of their financial life. So, the important thing for
you to know is, number one, you should be advising your clients about long-term care
insurance, and what the tremendous need is.
You should be advising your clients about saving for long-term care and for retirement
at the same time, but you should also notice, for those clients, particularly adult children
who have elderly parents, you should be aware that if there's some reason that they can't
qualify for Medicaid and their parent does not have a plan for how to pay for the long-term
care, there are methods that are available to them, either through advance trust planning,
or through the Miller trust that can help them qualify for Medicaid, so that it relieves
your client of that planning burden, and from the expense burden of long-term care.
Meador: One thing I want to add to that, too, from a CFP standpoint is if you do a plan
for a client, you better add long-term care insurance into that plan as an option for
that client, and if that client decides not to get long-term care, you better have that
well-documented in terms of why they decided not to do that. That's to protect you.