A Personal Journey
When I first started managing money for my parents, I thought I was well prepared.
My parents had done everything right. They had their wills, trusts, and Medicaid plans all neatly organized in a binder. The lawyer who set it up sat down and went over all of it with them and with me. I took notes, I had experience reading contracts and legal documents, so everything made perfect sense to me when it was set up.
When the time came that we were getting close to needing long-term care for my father, I realized that while I understood the concepts of my parents’ estate plan, how to enact the plan and take advantage of the groundwork they had laid was a different story. If only I had known then what I know now, the journey would have been much smoother.
In this blog post, I’ll share some basic concepts about estate planning and Medicaid planning you can use as a foundation to build to understand options for long term care. Hopefully, this will help you navigate these waters with a bit more confidence and a lot less stress.
Estate Planning: The Big Picture
Estate planning is like creating a roadmap for your assets after you pass away. It involves making decisions about who gets what, when they get it, and how they get it. Here are some key components:
Wills and Trusts
These are the primary tools for distributing your assets.
A will is a legal document that outlines your wishes for asset distribution and guardianship of minor children. Assets distributed through a will are part of the decedent’s estate and go through a process called probate unless they are under a certain amount which varies by state.
A trust, on the other hand, can help manage your assets during your lifetime and after your death, but can also potentially take advantage of tax benefits and avoid probate.
Power of Attorney
This legal document allows you to appoint someone to make financial and legal decisions on your behalf if you become incapacitated. It’s like giving someone the power to act as you in financial matters.
Healthcare Directives
These include a living will and a healthcare power of attorney (also known as a healthcare proxy). A living will outlines your wishes for medical treatment if you’re unable to communicate, while a healthcare power of attorney designates someone to make healthcare decisions for you.
Beneficiary Designations
These are used for assets like bank accounts, life insurance policies and retirement accounts. It’s important to keep these up to date to ensure your assets go to the intended recipients. Naming beneficiaries on your accounts also allows those assets to pass directly to your beneficiaries and avoid probate.
Estate planning is all about ensuring your wishes are carried out and your loved ones are taken care of after you’re gone. But what about the here and now, especially if you or a loved one needs long-term care? That’s where Medicaid planning comes in.
Medicaid Planning: Preparing for Long-Term Care
Medicaid planning is a subset of estate planning that focuses on qualifying for Medicaid benefits to cover long-term care costs without depleting your assets. These same strategies can also be useful for qualifying for other need-based aid programs such as VA Aid and Attendance benefits. Here’s what you need to know:
Medicaid Eligibility
Medicaid is a federal and state program that helps with healthcare costs for those with limited income and resources. To qualify, your income and assets must each be under a certain amount.
Income and asset limits vary by state, and depending on the type of Medicaid needed (eg. nursing home, community based services, aid for blind and disabled), and whether you are single, married with one spouse needing benefits, or married with both spouses needing benefits.
Asset Protection
The goal of Medicaid planning is to protect your assets while ensuring you qualify for benefits. This can involve strategies like transferring assets to an irrevocable trust, spending down assets on exempt items (like home improvements), or purchasing Medicaid-compliant annuities.
Look-Back Period
Medicaid has a five-year look-back period, meaning any asset transfers made within five years of applying for benefits can be scrutinized and potentially penalized. Transfers include any asset that was transferred to a trust, given away, or sold for less than its value. It’s crucial to plan ahead and make transfers well before you anticipate needing care.
Spend Down
When someone has assets or income above the Medicaid limits, it doesn’t mean they’re out of luck. It just means the government will expect you to chip in for your own long term care before Medicaid will kick in. The amount you chip in will be the amount needed to get you down to the threshold. If you have assets above the limit, you will be expected to “spend down”, or use, those assets to cover the cost of your care until your assets are down to the allowable limit. Certain types of assets may be exempt from being counted, which is why a qualified Medicaid planning professional can help advise you on strategies for protecting those assets.
Likewise, if your income is above the limit, you aren’t out of luck… you may still be able to qualify for Medicaid, but Medicaid will cover less because you will be expected to contribute some of your own income towards your long-term care as well. If you have enough income to cover the full cost of your long-term care without bringing you below the Medicaid income limit, you will not be eligible to receive Medicaid.
Spousal Protections
If one spouse needs long-term care, Medicaid planning can help protect the healthy spouse from financial hardship. Some states have guidelines that automatically provide higher limits when there is a healthy spouse, or strategies like spousal refusal, where the healthy spouse refuses to support the other financially, allowing the ill spouse to qualify for Medicaid.
Professional Guidance
Medicaid planning is complex and ever-changing. Working with an experienced elder law attorney or financial planner can help you navigate the rules and develop a strategy that fits your unique situation.
Key Differences and Overlaps
While estate planning and Medicaid planning serve different purposes, they often overlap. Here are some key differences and how they can work together:
- Purpose: Estate planning focuses on asset distribution after death, while Medicaid planning aims to qualify for long-term care benefits without depleting assets.
- Timing: For the most part, Estate Planning can be done as long as the person is competent to make their own decisions, while Medicaid planning may require actions further in advance to properly protect assets due to the look-back period.
- Tools: Both use tools like trusts, but for different purposes. An irrevocable trust can protect assets for Medicaid planning, while a revocable trust is more common in estate planning for flexibility and control.
Lessons Learned
Looking back, I wish I had known the importance of understanding both estate and Medicaid planning. Here are a few tips based on my experience:
- Start Early: Don’t wait until you’re in crisis mode to start planning. The earlier you start, the more options you’ll have.
- Get Professional Help: Navigating these waters alone can be overwhelming. An experienced attorney or financial planner can provide invaluable guidance.
- Ask Questions Upfront: The strategy is indeed the most important part to understand in the planning phase. But I suggest educating yourself on Medicaid qualifications in this phase and asking specific questions such as how your income and assets position will compare to the limits and what type of spend-down to expect.
- Communicate: Talk to your loved ones about your plans and wishes. Clear communication can prevent misunderstandings and ensure everyone is on the same page.
- Documentation is Key: Most people know to keep a copy of their legal documents (wills, trusts, power of attorney, etc.) in a safe place, but it is critical to also document all the other practical information the executor or trustee will need to know to step in an manage your affairs. Consider creating a Life Log to get everything in order and make your delegate’s job a lot easier.
- Stay Informed: Laws and regulations change, so it’s important to stay informed and update your plans as needed.
Managing my parents’ finances was a challenging but ultimately rewarding experience. I am not an attorney and am only able to share general knowledge, not specific legal advice for your situation. While I encourage working with a qualified attorney to understand your situation and develop your own strategy, I hope this general knowledge can give you the groundwork to make your journey a little easier.
Remember, planning ahead can provide peace of mind and ensure that you and your loved ones are well taken care of, no matter what the future holds.
I hope this post helps you understand some of the basic terminology and concepts of estate planning and Medicaid planning. If you have any questions or need assistance with translating your legal strategy to practical actions, creating a Life Log, or just talking to someone who has experience with the process, schedule a free consultation with us at Advocate Money Management. We’re here to help you navigate these complex waters with confidence and ease.
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