Medicaid Mayhem (II): Excellent Exceptions

"There’s always an exception that proves the rule.”

- Anonymous

We started out our Medicaid discussion by talking about the basics. Your Medicaid application will be successful only if you own $2,000 or less of (allowable) assets. One your application is approved, you must then contribute all of your income toward paying for your care. Today, we’re going to start talking about that little word in parentheses: “allowable.”

Title XIX of the Social Security Act provides for the exclusion of a variety of assets when calculating the total assets owned by a Medicaid applicant. These exclusions take several forms: there are exclusions for certain financial instruments, exemptions for certain physical assets, and exceptions for when a spouse is involved.

For example: a single Medicaid applicant may own one automobile in addition to the $2,000 asset limit. Other allowable assets include a pre-paid funeral plan and life insurance with no cash value.

The exemptions, exclusions, and exceptions are the bread and butter for an attorney with experience in long-term care planning. Stay tuned to the Medicaid Mayhem series to learn more about some of these options.

------------------

Lawyer Joke of the Day:

Did you hear they just released a new Barbie doll called "Divorced Barbie"? It comes with half of Ken's things and alimony.

Medicaid Mayhem (I), Two Simple Rules?

"Medicaid is the primary payer of Long Term Care.”

- Vincent Russo

One of my goals for this blog is to make it a place where people can go to get basic questions answered. With that in mind, this post shall be the first in an ongoing series of posts called Medicaid Mayhem. Let’s start today by talking about the standard rules on which the long-term care portion of Medicaid is built. (As an aside, Medicaid and Title XIX are interchangeable terms for purposes of this series.)

The Medicaid system is designed to act as a health insurance provider for low-income, low-net worth people. The theory is that you can apply for and receive government assistance if you cannot pay for your health care on your own. This extends to the nursing home program of Medicaid as well. To receive Medicaid assistance for your nursing home care, you must comply with two major rules.

1. You must have assets with a value of no more than $2,000 total.
   
2. You must contribute all of your income toward paying for your care.

These rules are the guiding principles under which all Medicaid applications are evaluated.

Looks pretty simple, right? It’s not. There are loads of rules on what assets are counted as part of the $2,000 limit and how applications are evaluated for married couples. These rules are what make Medicaid a complicated system. Don’t make major financial decisions in an effort to get on Medicaid. Seek the help of a trusted advisor with knowledge of the system.

------------------

Lawyer Joke of the Day:

An engineer, a physicist, and a lawyer were being interviewed for a position as chief executive officer of a large corporation. The engineer was interviewed first, and was asked a long list of questions, ending with "How much is two plus two?" The engineer excused himself, and made a series of measurements and calculations before returning to the board room and announcing, "Four."

The physicist was next interviewed, and was asked the same questions. Before answering the last question, he excused himself, made for the library, and did a great deal of research. After a consultation with the United States Bureau of Standards and many calculations, he also announced "Four."

The lawyer was interviewed last, and was asked the same questions. At the end of his interview, before answering the last question, he drew all the shades in the room, looked outside the door to see if anyone was there, checked the telephone for listening devices, and asked "How much do you want it to be?"

It Costs a Lot to Die These Days

"They say such nice things about people at their funerals that it makes me sad to realize I’m going to miss mine by just a few days.”

- Garrison Keillor

One of the most logical and effective ways to plan for Medicaid eligibility is to prepay your funeral expenses. As uncomfortable as contemplating your own mortality is, creating a funeral plan with an itemized list of expenditures can allow you to protect a significant amount of money when you need nursing home care. The reason this is such a logical planning option is that creating a funeral plan allows you to set aside money that will be spent regardless of whether you plan ahead or not. Planning to pay for your funeral is like planning to pay the gas bill. It has to happen eventually.

Furthermore, creating a funeral plan is an extremely effective Medicaid planning tool because funeral expenses are so high. In the town where my physical office is located, the average funeral costs $9,000 - $12,000, depending on which costs you include. Funeral home expenses alone fall in the $9,000-$10,000 range. If you add in the cemetery plot and monument, a single person can easily spend $12,000 before all is said and done.

These expenses are intimidating for a lot of people. And rightly so; funerals are expensive! But the high cost of a funeral allows an individual to place a substantial amount of funds into a prepaid plan which will cover those costs. Because such a prepaid plan is Medicaid-exempt, it’s a good idea to consider prepaying funeral expenses when a Medicaid application is imminent.

------------------

Lawyer Joke of the Day: (Apologies if this one is offensive. It made me laugh out loud.)

Satan was complaining bitterly to God, "You made the world so that it was not fair, and you made it so that most people would have to struggle every day, fight against their innate wishes and desires, and deal with all sorts of losses, grief, disasters, and catastrophes. Yet people worship and adore you. People fight, get arrested, and cheat each other, and I get blamed, even when it is not my fault. Sure, I'm evil, but give me a break. Can't you do something to make them stop blaming me?"

And so, God created lawyers.

The Life Estate: A Specialized Tool

Last time I mentioned that a life estate can be used to avoid probate. To explore how that works, we should first talk about what a life estate is.

Property ownership has many aspects. Title to a piece of property can be shared, like in the joint ownership we discussed briefly last time. It can be divided physically, with different people each taking a small physical portion of the asset. An example: $500 cash can be divided among four people by giving each person $125.

Property can also be divided temporally. No, this is not science fiction; title to a property has a time element as well as a physical element. A person who has full ownership (called ‘fee simple’) of a piece of property can divide that property into a present ownership interest, called a life estate, and a future ownership interest, called a remainder interest.

When a life estate is created, the property owner reserves the right to use and benefit from the property for as long as he is alive. He or she can lease out the property to a third party or use it for their own personal benefit.

The property owner also transfers all rights to the property after his death to a second individual. That individual has basically no control over the property while the original owner is alive, but automatically receives the property (in fee simple) when the original owner dies. The remaindermen take full ownership even if the life estate holder sold the property while he or she was alive. The ownership change happens automatically; no other action (such as probate) by the remainder holder is required.

This sounds like a really great way to do estate planning. Just give your heirs a remainder interest in all your property! Except that it’s not that simple. There are rules about “waste” and many types of property do not lend themselves to life estate creation. You wouldn’t want to give your kids a remainder interest in your savings account because the waste rules would restrict your ability to access and spend that money.

I mentioned last time that life estates used to be a common tool in estate planning because it made it very easy to transfer ownership – most often of land – to a person’s heirs while avoiding the expensive probate process. It also provided certain protections when applying for Medicaid: a life estate used to be non-countable for Medicaid purposes. The Deficit Reduction Act of 2005 changed all that. Medicaid now assigns a value to a life interest based on that person’s life expectancy on the Social Security tables.

The use of life estates can be effective when estate planning, especially in circumstances where trusts are involved. Many attorneys (at least where I live and practice) still use life estates as one of their primary tools in estate and long-term care planning. Ask about how a life estate will affect a Medicaid application.

Or, better yet, get a second opinion. Our first consultation is free. Call 712-737-3885 to set up an appointment.

------------------

Lawyer Joke of the Day:

There's an interesting new novel about two ex-convicts. One of them studies to become a lawyer. The other decides to go straight.

Quick and Dirty Estate Planning

Several months ago, I mentioned some essential elements to an estate plan. Those elements are the items that any estate planner should discuss with you and help you implement. Some of the items in that list are designed to simply transfer wealth. Others have multiple uses. For example, the trust can be used to avoid probate.

The elements in that list are not the only tools that can be used in estate planning. Before the Deficit Reduction Act of 2005 went into effect, a common method of avoiding probate was to place large assets into what is called a life estate. This was done because, at that time, a life estate also provided some amount of long-term care planning. We’ll talk about what a life estate is next time.

Another method of avoiding probate is to hold assets in joint tenancy. Joint tenancy exists when two persons are listed as joint co-owners of an asset. In Iowa, most attorneys create joint tenancies with the phrase “as joint tenants with full rights of survivorship and not as tenants in common.” This means that each of the two (or more) owners automatically takes full ownership of the asset when the other dies.

Joint tenancy has other consequences too, however. If you own an asset in joint tenancy, each owner has the right to access the full value of the asset. For example: if you make your son-in-law a joint account holder on your checking account, he can write checks and withdraw funds without your approval. A joint owner of a piece of land may legally borrow against the full value of the land without your consent.

Here’s the upshot: if your advisor suggests creating a joint tenancy, ask them about the risks before you dive in headfirst.

------------------

Lawyer Joke of the Day:

A doctor was vacationing at the seashore with his family. Suddenly, he spotted a fin sticking up in the water and fainted.

"Darling, it was just a shark," his wife assured him when he came to. "You've got to stop imagining that there are lawyers everywhere."