How, When & Why to Protect a Family’s Financial Assets When Applying for Medicaid Long Term Care

It is a common misperception that a family or couple must give up or “spend down” all their financial assets in order for a loved one to qualify for Medicaid Long Term Care. This is not the case. Not only does Medicaid offer certain protections to prevent spousal impoverishment, but there are also proactive steps a family can take to preserve much of their financial assets.


Why It’s Important to Preserve a Family’s Financial Assets When Applying for Medicaid

The two most common reasons families or couples seek to preserve assets when applying for Medicaid are to protect against future care needs and to provide for dependent family members. However, every family’s situation is unique and there are as many reasons as there are families.

When one spouse enters a Medicaid nursing home and the other spouse continues to live independently at home, Medicaid provides for an income allowance and resource allowance to enable the independent spouse to afford to live independently. These allowances are usually adequate for a spouse to live a modest lifestyle. However, what if that spouse requires care in the future? These allowances are not significant enough to pay for full-time in-home care or really even part-time. Assisted living or memory care costs $4,000 – $6,000 per month and the Medicaid allowance certainly will not cover that level of cost. By preserving a family’s assets, couples can protect themselves against future care costs.

Dependent family members are the other big reason it can be important to protect financial resources. While most often family members rely on the family home, we discuss protecting the family home from Medicaid at length in a separate article. Dependent or disabled children, spouses or siblings may need financial assistance beyond the basics for which Medicaid provides. Proactively planning for the needs of these individuals is necessary.


Strategies to Preserve Assets When Applying for Medicaid Long Term Care

There are a variety of strategies that can be utilized to help a family or couple preserve their financial assets when applying for Medicaid. Which strategies to employ are specific to the family, their financial situation, and the state in which they reside. A few of the more well-known strategies have intimidating names which underscores the complexity of employing them. Modern Half a Loaf, Medicaid Divorce, Asset Protection Trusts, and Spousal Refusal to name a few.

 The strategies are complex and if implemented incorrectly can result in a Medicaid denial, penalty, or loss of assets. It is strongly recommended families work with a Medicaid planning professional.


Half a Loaf Strategies

There are or were three ‘loaf’ strategies that specifically allow individuals to preserve some of their assets for family members, the Half a Loaf, Reverse Half a Loaf and Modern Half a Loaf. The latter of which we will discuss here as the former two are either obsolete or nearly so.
The Modern Half a Loaf allows the individual to gift about 50% of their excess assets to family members and then buy a short-term annuity after. An annuity often is used for retirement and is an insurance contract that provides an income stream that pays out. This will no longer count as assets for the individual trying to qualify for Medicaid, and therefore allows the family to keep income without penalty to the applicant. This does not violate Medicaid’s look-back rule, which reviews someone’s assets to ensure they are not giving them a way to meet the qualifications. The look-back rule allows Medicaid to look at all transfers 60-months prior to the Medicaid application. The Modern Half a Loaf strategy is also called the Reverse Medicaid Half a Loaf with a Medicaid Compliant Annuity.


Asset Protection Trusts

A Medicaid Asset Protection Trust (MAPT) is a specific trust in which allocated assets are exempt from being counted toward eligibility. A MAPT will need to be created well in advance of applying to Medicaid, due to the look-back rule. Medicaid Asset Protection Trusts are considered gifts and therefore are not exempt from the review of assets. Therefore, this type of trust should be established five years in advance of application, with the exception of California and New York, where the look-back rule is 2.5 years prior to the application. Otherwise, you may find that your trust is in violation of the look-back rule and therefore not be beneficial.

There is a cost to create a Medicaid Asset Protection Trust, which can range from several thousand to over $10,000. While this can seem like an expensive initial investment, it can safeguard significantly more than that as well as protection a home from the Medicaid Estate Recovery Program. It may be difficult to find someone who will complete a MAPT alone, as the attorney or financial planner may want to include other advance planning strategies. This may be a beneficial option to ensure all of your end-of-life planning is completed and finalized.

There are state-specific rules to Asset Protection Trusts so make sure your family works with a professional who is knowledgeable on the subject.


Medicaid Divorce

Medicaid divorce is when two individuals choose to divorce to protect their assets and qualify for Medicaid. Medicaid considers all assets of a married couple to be jointly owned. This is true even if only one spouse’s name is on the asset ownership document. However, when divorced, assets are no longer considered to be jointly owned thereby allowing the non-applicant divorcee to maintain a higher amount of assets then they would otherwise be permitted under Medicaid rules. Divorce does not work in all scenarios nor all states. Furthermore, Medicaid rules have been modified to prevent families from having to take this approach which many people find to be unpleasant. Lastly, Medicaid divorce is only relevant for couples with significant assets.


Spousal Refusal

Spousal refusal is a strategy utilized by married partners to simply refuse to pay Medicaid for long-term care. Care cannot be refused by Medicaid because the spouse refuses payment, which means the applicant will still get the care they need. The spouses can retain and protect their assets. For this strategy, it is important to understand your Medicaid income limit and asset limit. This can vary wildly, with New York allowing spouses to keep over $15,000 in assets and other states $2,000 according to 2022 numbers.

 Note: One of the largest concerns with spousal refusal is that the state’s Medicaid agency can pursue a lawsuit against the spouse for refusing to pay for long-term care for their partner. If one is to take this route, it’s important to consider this as a possibility. Should this happen, the non-applicant spouse will receive a letter in the mail from the state requesting repayment of services. The non-applicant spouse can pay the amount, negotiate, or refuse to pay and risk a lawsuit.

Before utilizing this option, it is best to speak with someone who can review your assets and assist with choosing the best method of retaining them. For instance, one can utilize a trust to protect their assets and allow an income stream to remain. Since there is a risk of legal repercussions, other options should be explored.


Irrevocable Funeral Trusts

There are trusts that can be established for funeral costs, which do not count towards Medicaid’s asset limit. This can reduce assets by up to $25,000 or even $30,000 (2022) for couples depending on the state in which the applicant is applying for Medicaid. There are many other types of funeral arrangements that can be pre-arranged but are not Medicaid exempt, so be cautious and specific when setting up this type of trust.