Tamara Marshall, Partner at Zanck, Coen, Wright and Saladin PC discusses Elder Law and Medicaid

The Difference Between Medicare and Medicaid

I’d like to start by talking about the difference between Medicare and Medicaid. Even as an elder law professional, I find myself thinking “Medicaid” in my mind and the word “Medicare” comes out of my mouth. It’s important to always remain clear what the difference is. Medicare is a health insurance type program for anybody who’s paid into the system throughout their work life and have reached the age 65. When you reach the age 65, then you qualify for Medicare, which has a hospital insurance component, a health insurance component, and a prescription drug component.

Medicaid, on the other hand, has certain financial and non-financial requirements. The non-financial requirements are, in effect, that you’re a U.S. citizen, that you’re a citizen of the state in which you’re applying, because Medicaid is a hybrid federal and a state program. If you know the rules for one state for Medicaid, you know the rules for one state for Medicaid. As a citizen of Illinois, you would qualify for the Illinois Medicaid program. You have to be age 65 or older, blind, or disabled. Those are the non-financial qualifications.

For the financial component, there are asset limits. Speaking in terms of skilled nursing facility, if you have a well spouse, the well spouse who’s going to continue living in the community can have up to $109,560, and their spouse can still qualify. The spouse who is applying for Medicaid can have up to $2,000. Income-wise, the spouse who’s applying for care in a skilled nursing facility, cannot have more income than the private pay rate at a skilled nursing facility. If they did, obviously they would have sufficient funds to pay for the care themselves and they would not need Medicaid. The community spouse is entitled to keep $2,750 a month minimum of their income and up to whatever amount of income they have for their own Social Security, pension, whatever source of income, with a caveat that, at a certain level of income, they are going to be expected to contribute to the Medicaid applicant spouse’s monthly cost of care, depending on their total income for the month.

Lookback Period for Assets for Medicaid

Speaking of assets, when I say that there’s an asset limit of $2,000 or 109,560, those are non-exempt assets. Certain assets are exempt. For instance, when you apply for Medicaid, you disclose all of your assets and finances for the past five years. That’s what we call the “lookback period.” The Medicaid application will be reviewed from the date of application five years retroactive. We look at the assets at the date of the application. If there is a marital residence that has equity in it, that can be up $552,000 of equity. In other words, the community spouse can be residing in a house with up $552,000 of equity, they can have $109,560 of assets, and their spouse will still qualify for Medicaid, because the equity in their house is exempt. There are certain other exempt assets, such as a vehicle, certain burial savings plans. There’s a number of assets that can be in the possession of the community spouse that would not disqualify the applicant due to their value.

Medicaid Application Process

As I stated previously, there’s a five-year lookback. When you submit your Medicaid application, the Medicaid workers will look at your past five years of finances in great detail, including scrutinizing any transaction of at least $1,000 or more. Be prepared to provide documentation for any such transactions. What they’re looking for is an impermissible transfer of assets. In other words, did you give money to your son because you want to qualify for Medicaid right away? Well, of course that’s not permitted. So, they’re going to scrutinize your finances for the past five years.

Certain transfers are permissible. For instance, any transfer for fair market value is not going to cause a problem. You will have to provide documentation for it. But for instance, if the residence where the community spouse is living or even a residence that’s going to be sold needs a new roof and $20,000 is spent on that, so long as you can provide the documentation that, in fact, you spent $20,000 on a new roof and that was the fair market value of the services and materials provided, then that’s fine. Any type of transaction for fair market value will not cause a problem. You can buy a new car. You can remodel a residence. There’s any number of things that you can do to spend money down to the asset limits. Certain transfers are also exempt. For instance, if there is a disabled child, you can make transfers to a special needs trust for a disabled child at any amount, including at a residence. That will not generate a penalty period for qualifying for Medicaid purposes.

Shifting Assets to a Spouse in Qualifying for Medicaid

One important thing to point out when it comes to thinking about qualifying for Medicaid is that transfers between spouses do not generate any penalty. To the extent that both spouses are on title to a marital residence and one spouse is going to need to go to a skilled nursing facility and there’s going to be an application made for Medicaid, you would definitely want to transfer the house to the well spouse’s name only. In the State of Illinois, they will put a lien on that asset. While it is an exempt asset, in other words, it will not disqualify that spouse from getting Medicaid, if that spouse’s name is on the house, there will be a lien put on it. In other words, they’re never going to kick out the community spouse out of the house, but ultimately when that spouse passes away or if that home needs to be sold, then that lien will be there and the government will be paid to the extent of the lien. That’s something that needs to be considered right away, putting that home in the name of the well spouse only to protect that asset and that equity.

Proactive Planning for Qualifying for Medicaid

When you’re thinking in terms of potentially qualifying for Medicaid, think in terms of proactive planning and what I call “crisis planning.” Proactive planning is you’re more than five years out from anybody needing to qualify for Medicaid. Statistically, there’s a very large number of folks who enter into their 70s or 80s who are going to need skilled nursing care at some point in their lives. The best way to plan for it is to plan for it in advance. That means maybe thinking about long-term care insurance when you’re young enough so that purchasing that doesn’t break the bank. They also have some new long-term care insurance policies that are different from traditional policies.

The traditional policies were sort of use it or lose it. You have to pay the premium over time and then if you never need the care, oh well. I guess you bought your peace of mind, but that’s all you got out of it. Now, there are certain hybrid policies where you purchase the policies and they will pay for long-term care if needed. Alternatively, if you don’t use them for the long-term care, then they will pay out a life insurance benefit upon your death. That’s something to consult with a qualified long-term care insurance professional to discuss that with. I certainly encourage anybody who’s thinking about these issues in advance to do that.

From the perspective of what I, as an attorney, can do proactively, we’d look at transferring assets to an irrevocable trust. The way an irrevocable trust works is that it is just what it means: it’s irrevocable. So, perhaps you have a certain amount of money that you want to make sure goes to your grandchildren’s education. Or perhaps there’s a piece of land that’s been in the family for years, and you want to make sure that that just stays in the family. We can transfer those items into an irrevocable trust. Once you transfer those items into this irrevocable trust, they truly are not your possessions anymore. You’re giving up ownership, because in order for the assets in the trust not to qualify for your asset limit, you have to give them away and give up control over them.

It’s important to choose a trusted trustee for your irrevocable trust, because that’s the person that is going to have control over assets during your lifetime before you pass away. Ultimately, when you pass away, they will be distributed according to your wishes. Although you’re giving up ownership and control over those assets early, you are exercising control over those assets by choosing a trustee who will carry out your wishes in putting them into the trust. You can also choose lifetime beneficiaries. To the extent that you want your children to have access to trust assets during your lifetime, you could put instructions in your irrevocable trust that will, for instance, distribute … you could name your grandchildren as lifetime beneficiaries and the trustee could distribute assets of the trust to them at the appropriate time for their college educations, et cetera, or whatever your objectives are during your lifetime. Then upon your death, much like a living trust or a will, you can put instructions in the trust what is to happen with the remaining trust assets upon your passing.

By funding an irrevocable trust more than five years before you need care for skilled nursing, you have proactively protected whatever assets are in the trust, because when it comes time to apply for Medicaid and we go through that five-year lookback, whatever is in that trust is not going to be counted toward your asset limit because you no longer own that or control the assets of that trust. So, that’s how proactively you can use an irrevocable trust to protect assets while potentially qualifying for a Medicaid skilled nursing facility benefit.

Medicaid Crisis Planning

I’ve spoken a little bit about proactive planning. Even if you don’t plan in advance and you or a loved one is in a position where they suddenly need skilled nursing facility … maybe your grandparent lived at home alone, but they had a fall and so now they’re just not going to get back to where they were and they need a skilled nursing facility. Perhaps they have a nest egg maybe of $200,000. Given the cost of skilled nursing facility, that’s not going to last a very long time in this day and age. There are ways of saving some of their assets, even in a crisis situation. That would involve also using an irrevocable trust.

What that looks like … and I’m going to use some just basic math figures to simplify things, but again, we would be using an irrevocable trust where the person who is needing to qualify for Medicaid would transfer assets to an irrevocable trust. In this instance, let’s say they have $200,000. We’re transferring $100,000 into the irrevocable trust. When we apply, that five-year lookback is going to apply and they’re going to see that transfer. They’re going to say, “Well, wait a minute. That was not a transfer for fair market value,” because transferring to an irrevocable trust is, in effect, a gift. There’s nothing received in return. That’s going to generate a penalty period. In the State of Illinois, a penalty period is calculated by looking at the amount of the transfer and dividing it by the private pay cost of care in the facility where the individual is trying to get into a Medicaid bed. Let’s just say that for simplicity that the monthly cost of care in the facility is $10,000 per month. You’ve made a $100,000 transfer to the irrevocable trust. So, we take $100,000, divide it by $10,000, and that’s a 10-month penalty period.

If you remember the hypothetical, we had $200,000. Now we have $100,000 that’s not inside the trust. Of course, we can’t have that sitting there, because then the individual is not going to qualify for Medicaid. So, we take that amount of money, we invest it in a Medicaid-qualified annuity, which is a very specific type of annuity. It is not an investment. It is simply a way of transforming this amount of money into an income stream to pay through the 10-month penalty period. Now we have $100,000 in the irrevocable trust. We’ve converted $100,000 to an income stream that will pay through the 10-month penalty period. We apply for Medicaid. The application is rejected, because they say, “But for the transfer of $100,000, you would qualify, so you need to serve the 10-month penalty period.” We have that annuity to pay through the 10-month penalty period. After the 10-month penalty period, the application to Medicaid is made again, and now the person qualifies for Medicaid. We have been able to preserve that $100,000 inside the irrevocable trust and still have the individual qualify for the Medicaid benefit. It’s not as beneficial as planning more than five years in advance, but it’s certainly an opportunity to save part of somebody’s nest egg.

The Best Time to Plan for Skilled Nursing Care

I think it’s never to early to plan for the possibility of needing skilled nursing care. In my estate planning practice, I frequently see people who … they’ve been married, they’ve had kids, their kids are off to college, and now they come in for the first time ever and they want to do their estate plan. They’ve been fortunate that there has been nothing that’s come up in the interim, but I think about these people and they may be in their 50s or 60s, but what are the odds that they’re going to come and check in with me regularly every three years for the rest of their lives? It’s probably not going to happen. I would say, at a minimum, if you’re doing an estate plan, talk to your attorney about putting language in your powers of attorney that will enable somebody to engage in Medicaid planning for you if something unforeseen happens in the future.

I can tell you, I’ve seen numerous children who have powers of attorney from their parents that were done years prior when there was never any concern about dementia or a stoke or anything like that. It was your basic property power of attorney, which will allow them to step into the shoes of their parents to do routine financial transactions. What a standard property power of attorney will not allow your agent to do that’s named in the power of property attorney is to engage in Medicaid planning, because that involves gifting. At a minimum, if you’re engaging in an estate plan and you want to be realistic about how often you’re going to review that plan and think about whether or not you might need Medicaid planning in the future, make sure that attorney specifies in your property power of attorney that your agent can engage in purchasing of annuities, creating irrevocable trusts, and other tools that are out there for Medicaid planning, should the need arise in the future. I can tell you, I’ve seen many children who would have liked to have their parents have the benefit of Medicaid planning even in crisis situations. Obviously, once they have a diagnosis of dementia and they’re not able to grant that authority any more, the authority’s just never going to be there. So, that’s one way of addressing it proactively.

The other way is to just think about … maybe just create an irrevocable trust for your house when you’re doing your traditional living will, which is to avoid probate but necessarily to plan for qualifying for Medicaid. If you can put your house in an irrevocable trust and you go five years without needing to apply for Medicaid for skilled nursing, then we’ve protected the equity in the house for both spouses, and potentially for children and for inheritance purposes in the future. It’s hard, I think, for sometimes people to put money in a trust and think, “Oh, I’m giving up access to money. I’m going to have to ask somebody for money, which is uncomfortable.” But putting that house in the trust typically isn’t such a stretch for people, so it’s a good thing to think about. Also, keep in mind, when we do the proactive planning with liquid assets, we put your assets in the irrevocable trust that you don’t intend to use in the next five years. We’re putting assets in there for future use to make sure they’re there if needed. We’re certainly not wanting you to have to go ask your trustee to go to the grocery store. That’s not what it looks like.

The Cost of Skilled Nursing Care, Elder Care Law

Speaking about the cost of care, when I do presentations and I talk about how much it costs to reside in a skilled nursing facility for one month, I always see big eyes in the audience. I think it’s important to know the cost of care. Here in the Chicago area, I would say that, for a skilled nursing facility, you’re going to pay anywhere between 8 and $10,000 per month for long-term care. For assisted living, I think that’s going to be at least $5,000 a month. The difference between assisted living and skilled nursing is assisted living is a lower level of care. The residents there need general supervision. They have their meals prepared for them. They need assistance with activities of daily living, such as dressing and bathing and things like that. There’s not a presence of medical care that is on hand 24 hours a day. The skilled nursing facility will cover all those same things as the assisted living facility, but we include a medical component there. There are certain administration of IVs or other medical elements that need to be there for the person’s care. They need that higher level of care of a skilled nursing facility. Of course, there are different levels of care in the skilled nursing facility.

So, the difference between assisted living is you’re not going to have that medical component there. In the skilled living facility, you are going to have that medical component. In both assisted living and skilled living, if there’s a memory care component, that’s going to add an additional cost, because now you’re talking about having a facility where there’s security that restricts access into the facility and access out of the facility to prevent wandering of folks that have dementia. Plus, there’s probably going to be a lower ratio of number of patients to care providers when you’re adding that memory component. So, $5,000 and up for an assisted living facility, 8 to $10,000 a month for skilled nursing facility. It adds up and can, unfortunately, blow through a life of retirement savings pretty darn quickly. It’s something to think about in advance.

Complimentary Consultation

My name’s Tamara Marshall. I’m an elder law and estate planning attorney with Zanck, Coen, Wright and Saladin in downtown Crystal Lake. I’m happy to meet with you for a complementary consultation to discuss your estate planning and elder care cost planning needs, maybe for yourself or maybe for a loved one. I’m happy to help educate you so that you have a plan in place when the need arises.