A lot of our clients that are in the midst of retirement planning hear about Medicaid planning. Since there are a lot of questions and misconceptions surrounding planning for retirement and Medicaid, we thought that it would be a great idea to clear up a few of these questions so that you can secure your retirement.
What is Medicaid and How Does It Relate to Your Retirement Planning?
Medicaid is a government program, and it’s, essentially, health insurance for certain individuals that meet a certain set of criteria, primarily “limited means.” There are a few criteria that must be met:
- Limited income
- Limited assets
- Aged 65 or older, or disabled
Medicare vs Medicaid
When you hear the requirement “being 65 or older,” it’s not uncommon to think Medicare. There’s a difference between the two, and while they may both be an option for someone 65 or older, it’s important for your own retirement planning to understand the key differences between the two.
- Medicare isn’t means tested, so if you’re over 65, you qualify for the program.
- Medicaid does require certain asset and income limits to qualify.
Medicaid, if you qualify, offers superb benefits if you can qualify for it. When it comes to long-term care, Medicare doesn’t cover much (20 days full coverage or 100-day partial). Medicaid will provide long-term care coverage, which is great for older individuals that may need to go into a nursing home.
Medicaid Planning and Your Retirement
Retirement planning is often all about protecting your assets and ensuring that you can draw an income stream to pay for your basic costs of living. Planning for Medicaid, since there are restrictions on income and assets, can be a little tricky.
Medicaid’s strict asset limit is $2,000 for assets, which doesn’t include your house or vehicle.
Protecting assets in the advance of the need is ideal because you can use strategic planning to qualify for Medicaid. A lot of people may assume that they can simply transfer assets out of their name to qualify, and this would be correct to an extent.
Medicare has a five-year lookback period, which, effectively, looks at whether you’ve transferred assets in the last five years. If you have transferred assets, you will be penalized and will lose eligibility for a period of time.
Pre-planning can help by allowing you to:
- Plan five years in advance to transfer assets
- Eliminate the risk of a penalty or losing eligibility
That’s why we recommend that you plan ahead of time if you think that Medicaid will be beneficial for you. You really want to think far ahead so that if you do need long-term care, Medicaid is available for you.
Trust us: the government will do its due diligence to make sure that you qualify for Medicaid.
But what about a crisis? You can’t predict everything. You might be as healthy as an ox at 64 and a half, and then a week after you’re 65, crisis strikes, and you need long-term care. There is crisis planning strategies that can help in these situations.
Crisis Planning to Meet Medicaid Eligibility
Medicaid’s rules change, and crisis strategies that work today, may not work tomorrow. The rules tend to get more stringent, so there’s no guarantee that one strategy will work for you. A few tactics that may work are:
- Transferring assets to a disabled child or a trust for a disabled child because there’s no penalty.
- If you’re under 65, a first-party special needs trust can be created.
- You may be able to transfer assets to a spouse, but this can be tricky because there may be assets that are jointly owned.
Crisis planning involves trying to convert your countable assets into non-countable assets. Let’s assume that you have a lot of cash. One method may be to pay off your mortgage. A home is a non-countable asset.
By paying off your home, you’re able to transfer cash out of your accounts while building equity in your home.
Strategies like this can be a major part of your retirement plan to qualify for Medicaid.
Married Couple Crisis Planning
Married couples also have strategies that they can use if crisis strikes, including:
- Medicaid compliant annuity
- Medicaid compliant promissory notes
When you’re married, Medicaid will look at the combined assets and require the couple to spend down possibly half of the gross asset amount. Let’s say that you have $100,000 in cash as a couple.
Medicaid may say that you need to spend $50,000 or so to qualify for Medicaid if one spouse is in long-term care and the other is not.
The spouse can choose to:
- Transfer the assets to the non-long-term care spouse, or
- Put the assets in a Medicaid compliant annuity
If this strategy was employed, the spouse that needs Medicaid would then qualify for Medicaid.
When you’re working on your retirement plan, it’s so important to spend the time to get your estate planning documents in place. You should have a will and other documents drafted, but one of the most important for Medicaid purposes is your power of attorney documents.
The power of attorney can use gifting strategies to help their spouse or loved one qualify for Medicaid using some of the strategies we just outlined above.
When to Seriously Start Thinking About Medicaid Planning
You can use legal strategies to qualify for Medicaid. It’s really never too early to begin your planning or at least start thinking about the planning. For example, even 35-year-olds can get into an accident or get diagnosed with cancer and need to enter long-term care.
A person in their 30s obviously isn’t thinking about long-term care, but the right legal documents would give their spouse or loved one the authority to transfer assets in their name to cover the cost of long-term care.
Long-term care is extremely expensive, so it’s never bad to think about Medicaid early on.
Since COVID hit, prices have skyrocketed for long-term care. Depending on your area, the cost can be $10,000 to $20,000 a month for care. It’s really important to consider how you would pay for such high expenses for long-term care.
Downsides of Early Medicaid Planning
If you’re healthy and/or young, chances are, you don’t want to transfer your assets away. But let’s say that you do. You know that you have an aggressive form of cancer and will need to be in long-term care.
You can transfer assets to your children, spend a year in long-term care, and then you make a recovery and can go back to normal life.
There’s no guarantee that your children will transfer the assets back to you, and you lose full control of these assets upon transfer. You should never take giving away assets lightly. While you’re sheltering these assets from Medicaid, the loss of control can have lasting implications, too.
Are you trying to secure your retirement and are considering your Medicaid or long-term healthcare needs? Give us a call today for a free consultation.