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What to do - and not do - in a Medicaid spend-down

If your parents live in New Jersey and you think they may need to move to a nursing home or an assisted living facility in the future, it is in their best interests and yours to start planning early for this eventuality. Why? Because annual costs for these facilities have skyrocketed in recent years and show no signs of reversing. 

Long term care insurance and Medicaid are the alternative. This governmental program, a joint federal and state venture, pays for an elderly person's in-home, nursing home or assisted living care. The catch? The person must be indigent in order to qualify. For Medicaid purposes, "indigent" means that each of your parents must have no more than $2,000 in assets.

While your parents likely are not wealthy, they also likely are not this poor. So what are they and you to do? The answer may be a Medicaid spend-down. If this is the route you and your parents choose to go, however, you need to start as soon as possible. Under the 2005 Deficit Reduction Act, the government has a five-year look-back period. What this means is that when your parents apply for Medicaid, the government will look at their gifts and property transfers during the past five years to determine whether or not they deliberately impoverished themselves so as to qualify for Medicaid.

Therefore, the sooner you and your parents start planning for their eventual long-term care needs, the safer they, their assets and you will be. Bear in mind that a planned Medicaid spend-down is not fraud or in any way illegal. Rather, it is a reasonable estate planning tool that provides for your parents' eventual needs while preserving their assets.

Irrevocable trust

One of the best ways to preserve what wealth your parents have, such as the value of their home, is for them to place all of their assets in an irrevocable trust. Once there, they no longer own their assets themselves; the trust does. Since the trust is irrevocable, they do not have and never again will have control over their assets. Their trustee has that control. The trust document directs him or her to use the trust assets for the benefit of your parents.

Obviously choosing a proper trustee is of the utmost importance. In all likelihood, your parents will want to designate you or one of your adult siblings as their trustee. Since this decision undoubtedly will have long-lasting effects on the family, calling a family conference to discuss it is a good idea so that no one's feelings will be hurt and no one will feel jealous or left out. If your family is like most, probably one of you is more qualified and/or available for trustee duties.

Home ownership transfer

If your parents' home is their only real asset, you may think the easiest thing to do in terms of a Medicaid spend-down is for them to deed it over to you or one of your siblings. While this may be a feasible idea, you need to use extreme caution. Again, this transfer must occur more than five years before your parents need to qualify for Medicaid. In addition, you must take the home's value into consideration.

The government can consider deeding a home to someone for "one dollar and other good and valuable consideration," the common wording on most warranty deeds, as a de facto gift, which in turn brings up gift tax considerations. Under the Tax Cuts and Jobs Act of 2017, however, a married couple has a lifetime combined gift and estate tax exemption of $22.4 million. If your parents' home really is their only major asset, deeding their home to you may well be the way to go.

Bottom line, a Medicaid spend-down can be a very complicated undertaking due to the myriad applicable state and federal laws. Consequently, you and your parents would do well not to attempt it on your own. This is one time when expert advice and counsel is in everyone's best interest and well worth the expense.

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