The Medicaid spend down process can be very difficult for families and loved ones. Without proper Medicaid planning, a healthy spouse and/or the estate’s beneficiaries will often be left with few remaining assets.
Fortunately, families facing this crisis have options available to them. Some insurance products can be used in conjunction with the advice of an elder law attorney in order to protect assets and preserve estate values. Our independent insurance agency can help you and your family with Medicaid friendly insurance products.
In passing the “Deficit Reduction Act of 2005”, Congress made it more difficult to qualify for Medicaid benefits than under the previous regulations.
The new rules present challenges to those who attempt to avoid the Medicaid spend-down and recapture process. The federal government has closed many of the former loopholes in the system. A brief synopsis of the new legislation illustrates many important changes:
The “look-back” period has been extended from three years to five years. The divestment penalty period has changed, potentially resulting in longer waiting periods for qualification. The decreased limit on the allowable home equity allowance is now $500,000. Additionally, last minute gifting from the estate has been eliminated.
Insurance companies understand that families may wish to shelter and transfer their remaining assets to beneficiaries. Accordingly, insurance carriers have created products designed to avoid Medicaid recapture.
Currently, there are a small number of companies offering policies in the Medicaid planning marketplace. The insurance product categories below offer a snapshot of the various plans that can help assist families who are planning ahead or currently involved in the Medicaid spend-down process.
Oftentimes, this is a policy and plan used before any other. According to Medicaid regulations, the cash value in almost all life insurance policies is considered a countable asset. Simply put, the cash value of life insurance must be spent before an individual might be considered for government assistance.
At present, the cash value used to fund an Irrevocable Funeral Trust is not subject to recapture however. Current laws allow persons on Medicaid to retain assets for a proper funeral. Unfortunately, these amounts are usually woefully inadequate.
However, a life policy used with an Irrevocable Funeral Trust allows for a lump sum deposit of $15,000 per individual. At passing, funds are paid to the funeral home of your choice. Using this technique, a family should have sufficient funds to pay for the funeral of the deceased while also sheltering a significant amount of money. The funds deposited or transferred into an IFT are not subject to the spend-down process. Policies can be also funded in advance for both a husband and wife in order to protect a larger portion of the estate.
In some cases, the existing cash value in a countable life insurance policy can be transferred tax-free in order to fund an irrevocable funeral trust. This method (referred to as a 1035 tax-free exchange) would protect a portion of an asset that would otherwise need to be spent down by the estate before government assistance might be available.
This once very effective product is often referred to as a Medicaid friendly annuity policy. Before recent legislation, the use of annuities was quite common. New restrictions make them less available than before, but in certain situations they might be beneficial to a husband and wife where one spouse is going through the Medicaid spend down process.
The annuity plan must have special language in the policy that prevents transfers of the account. It must be nonassignable, non-transferable and have very little cash value. It must also be purchased based on the life expectancy of the insured. This is referred to as a life annuity or annuitization and will prevent Medicaid from spending down then entire value of the monies deposited into the annuity.
When using the correct annuity account and setting it up properly to pay over the insured’s lifetime, there are instances when the deferred annuity funds will not be counted during the Medicaid spend down process. The annuity income can be made available to the well spouse for his or her living expenses. However, if the account is incorrectly setup, then it may be of little benefit to the well spouse and/or estate.
The latest innovation in asset protection is a form of single premium life insurance. Designed to transfer a creditor-protected stream of income to beneficiaries, this new life policy may not be considered as a countable asset for Medicaid purposes.
This is a guaranteed issue life insurance policy meaning no medical underwriting is necessary for the insured. The policy has several unique factors. It is designed to be non-assignable, irrevocable, non-commutable and to have no cash value. Furthermore, no loans, surrenders, beneficiary changes or other adjustments are allowed to the policy once it is in force (after the allotted 20 day “free look” period).
The policy has much of the same language as the aforementioned Medicaid annuity and Irrevocable Funeral Trust policies. The single premium policy is designed to help individuals qualify for government assistance programs earlier. In theory, an individual may be able to protect and pass on a portion of their estate and still be eligible for government assistance. Thus, this product may only be helpful for the preservation of an estate in certain situations.
In summary, consumers have some options available to them in order to protect their assets, their estates and their loved ones. By employing certain preventive measures, many families can avoid the mental and financial anguish associated with long term care expenses and the Medicaid spend down process. We can help with the insurance products.
Of course, the best way to protect an estate might simply be through the purchase of a long term care policy while the estate owner(s) is still in good health, but that is not always available.
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