Six Hard Truths About Medicaid Planning

Say goodbye, as your children sail off with your money.

Say goodbye, as your children sail off with your money.

The New York Times had a very interesting article today about long-term care insurance and Medicaid: How the Medicaid Debate Affects Long-Term Care Insurance Decisions.  If you're considering long-term care insurance or Medicaid planning, the article is worth a read.  Before giving you some of the compelling statistics from the article, I want you to first ask yourself these questions.  For people who are 65 or older:

  • What percentage will need long-term care at some point before they die?
  • What percentage will need long-term care for 2+ years?
  • What percentage will need long-term care for 5+ years?
  • What percentage will spend $250,000+ on long-term care?

If you've received direct mailings from elder law attorneys or been to an elder law seminar, you might think that almost everybody needs long-term care, that almost everybody needs it for a long time, and that everybody who doesn't pay thousands upon thousands of dollars for an irrevocable Medicaid trust will lose all of their assets to pay for long-term care.  In fact, here are the actual answers to those questions:

  • 52% of people 65 and over will need long-term care at some point before they die.
  • 27% of people 65 and over will need long-term care for 2+ years.
  • 14% of people 65 and over will need long-term care for 5+ years.
  • 8.6% of people 65 and over will need to spend $250,000 or more out of their own pockets.

Now, this post isn't about long-term care insurance, although I will touch on it at the end. This post is about Medicaid planning, or the notion that you can take your assets, pass them to the next generation through an irrevocable trust, and then use Medicaid to cover your long-term care costs.  It is easy to find resources from elder law attorneys as to why Medicaid planning is so great.  The flip side of this coin tends to go unseen.  Inspired by those statistics above, I am writing this post to simply give you some additional facts to consider if you are interested in Medicaid planning.   This post may offend some people and some attorneys, so to anyone who is offended, as Rodney Dangerfield might say, I'm only being critical of others, and "It looks good on you, though!"

Ok, ok.  That was wrong.  Joking aside, I'm completely serious that not everyone reading this should be offended.  Medicaid planning can be appropriate in a number of situations, and many attorneys who practice elder law are upstanding members of the bar.  But if you're going to engage in Medicaid planning or talk to an attorney about it, there are some things you need to know.

1. THE RISK OF LOSING ALL OF YOUR ASSETS TO LONG-TERM CARE IS OVERBLOWN.

Does it happen?  Yes.  Will it happen to you?  It depends, among other things, on your luck, your family history, your assets, and the willingness and ability of your family to take care of you (more on that below).  But, as you can see by the statistics above, the odds are not nearly as bad as they're made out to be.

2. IF YOU WANT TO SHIELD YOUR ASSETS AND QUALIFY FOR MEDICAID, YOU WILL LOSE CONTROL OF YOUR ASSETS.

You might be told that the money in the trust is still yours if you need it, or that your kids will give you the money back if you need it.  Truthfully, that's just putting lipstick on a pig, or polishing a...well...let's just stick to clean idioms.  While there are ways to mitigate the loss of control by retaining certain rights when you establish a Medicaid trust, at the end of the day, your assets will no longer belong to you.  You will be dependent on other people to give your money back to you if you need it.  Given that Ohio and most other states impose a 5 year lookback period--where the assets are still considered yours for the 5 years following the transfer of the assets out of your name, and can therefore prevent you from qualifying for Medicaid--there's a good chance you might need the money back.

3. IT'S EXPENSIVE TO DO THE PLANNING.

Medicaid trusts aren't cheap.  If you paid for one or received a quote for one, you know what I'm talking about.  I've heard quotes as high as $15,000.  Again, the chances of the average person 65+ needing long-term care are nearly 50/50, and given the 5 year lookback period, the odds of planning actually saving you money may be a lot lower.  When you pay to do the planning, though, the chances of you shelling out the attorney fee are 100%.

4. BE CAREFUL WHO YOU HIRE, AS SOME ATTORNEYS WHO DO THE PLANNING DO NOT UNDERSTAND THE TAX CONSEQUENCES.

If you want to take retirement account assets out of your name and put them into an irrevocable trust, that's a taxable event, and you will owe income tax on the amount you moved.  That's a big deal for you.  If you don't retain certain rights over a Medicaid trust, then when you pass, the assets in the trust will not receive a step-up in basis, meaning that your beneficiaries might have to pay capital gains taxes that they could have easily avoided.  That's a big deal for your beneficiaries.  

I hate to say it, but some attorneys (though definitely not a majority) are guilty of finding a form or two and thinking that they are competent to practice in a certain area.  Just because you give a podiatrist some neurosurgerical tools doesn't mean you want that podiatrist to do your brain surgery.  If you ask your attorney how a Medicaid trust affects your tax basis and he or she answers with a blank stare, that's a red flag.

5. THERE ARE MORAL ISSUES INVOLVED.

I try not to be judgmental, but when 90 year-old clients with $4,000,000 come to me whose kids are 60 and perfectly well-off, and the clients (or more often, their kids) want to discuss Medicaid planning, I have to admit that I judge a bit.  Medicaid is a government program designed to benefit low-income individuals and families.  It is not designed for people who want to make sure their $4,000,000 estate remains fully intact for their kids.

The more common scenario, though, is that clients come to me who are in their late 50s or early 60s, who have saved up a nice $1,000,000 to $2,000,000 nest egg, and who soon hope to retire.  These client should be talking about basic estate planning documents--like Wills, revocable living trusts, financial powers of attorney, and healthcare powers of attorney.  Instead, they caught wind of this concept that everybody will need long-term care for 10+ years, that it will drain all of your assets, and that if you're not taking steps now, while you're young, to protect your assets from Medicaid, then you're making a huge mistake.  In reality, these clients should be excited that they've worked towards financial freedom.  Instead, they are afraid or convinced that now is the time to give that freedom up by unloading all of their assets.  It's depressing, and that fear simply isn't justified.

In the first scenario, clients and/or their kids wander into some muddy moral and ethical waters.  In the second scenario, it tends to be attorneys who are to blame, not the clients, who are afraid and confused, and who simply want some guidance.

I hesitated to include this point, because I do not want to disparage people for exploring Medicaid planning.  I included it, though, because if you Google "Is Medicaid ethical?" you will see that elder law attorneys are the only ones really answering that question.  As you might suspect, their opinion on the subject is a little biased.  It's a bit like asking the internet "Are dryer sheets safe?" and only getting answers from the companies that make Snuggle and Bounce.  There are a number of elder law attorneys who do great work, and who help well-intentioned and deserving people navigating the confusing web of benefits and issues.  But there are some who are unscrupulous.  You need to weigh these issues on your own and decide what you think is appropriate.  

6. IT VERY WELL MIGHT CHANGE YOUR CHILDREN'S WILLINGNESS TO TAKE CARE OF YOU.

I hate to say it, but it's true.  When kids see that long-term care might cost $6,000+ a month and that their future inheritance might be used to cover it, they're eager to roll out the welcome mat.  For sure, some kids will take care of their parents for as long as possible out of the goodness of their hearts and because it's the right thing to do, but some need a little incentive.  If all your assets are already in an irrevocable trust for your kids, or have already been transferred to your kids, and that financial incentive is removed, some kids are quick to pack your bags and call an Uber.  It's difficult to know whether your kids fit that description until after the planning is in place and you've already moved your assets.

Parting Thoughts

If you think you might need long-term care and if you're not already on Medicaid, you should look into long-term care insurance.  It's insurance, so there will be a premium, a deductible, coverage limitations, etc., and the deck will be stacked in favor of the insurance company.  But as compared to an irrevocable Medicaid trust, insurance will allow you to hold onto your assets, save you thousands of dollars in legal fees, potentially get you into certain facilities where Medicaid recipients aren't welcome, and leave Medicaid to the people who truly need it.  If you prefer to get rid of your assets so that you can go on Medicaid, that's fine.  But make sure you retain an experienced attorney who can help you, make sure the attorney shows you the pig behind the lipstick, and make sure that YOU are driving the process, not your children or future beneficiaries.