Planning for Elderly Parents: Medicaid Myths and Truths

BY MELISSA DONAVAN AND BRAD WIEWEL

Imagine you are at a social event and are asked by someone for advice about an elderly relative who is running out of money and may need to be placed in a nursing home. You want to be helpful and could be tempted to give a vague and general response based upon something you heard in a CLE program years ago. But before you begin to answer that question, remember what you read in this article below about the myths and truths of Medicaid.

MYTH: “The State can take my mom’s house if she goes on Medicaid.”

THE TRUTH: This is a deeply rooted myth, but the reality is that an individual’s home, whether married or single, is usually an exempted resource. If a single homeowner has equity of over $595,000, the home will not be fully exempt. If a homeowner actually receives Medicaid, the home may be taken by the State of Texas after death; this process is called estate recovery. The emphasis is on the word “may.” Although the state could foreclose to recover the money it has paid out to the Medicaid recipient, this process cannot be used if the spouse, and in some cases other immediate family members, of the recipient is still living in the home and, in any event, cannot occur until the recipient has died. And with preplanning, the home can be protected. The best way to accomplish that is with a transfer-on-death deed. The State can only seize homes that go through the probate process. By doing a transfer-on-death deed in advance, the property goes to the beneficiaries directly and not through probate. Lady bird deeds are another option where a transfer-on-death deed is not available, namely if mom’s agent under her power of attorney needs to sign the deed.

MYTH: “Dad has to give away everything he owns to get Medicaid.”

THE TRUTH: An individual is permitted to retain a specific dollar amount of countable property and 100 percent of exempt property and still be eligible for Medicaid. Under Texas rules, exempt property includes the personal residence, a motor vehicle, personal belongings, household furnishings and medical equipment. There may be other exempt assets, depending on your circumstances. Many families make the disastrous mistake of transferring all of the parent’s assets to themselves to bring the value of the parent’s estate below the Medicaid eligibility levels. This would be a disqualifying transfer and results in the parent being penalized from receiving Medicaid for months or years, depending on the amount transferred. Even if there is an opportunity to cure this, which may not be the case, this informal strategy creates more work, expense, and stress. The “look-back” period also plays a significant role. See below.

MYTH: “Mom has to wait three years after giving anything away to get Medicaid.”

THE TRUTH: There is now a five-year “look back” or penalty period for asset transfers under the Medicaid rules. However, the disqualification, or period of ineligibility, isn’t always five years long and sometimes there is no disqualification at all. While certain transfers can cause ineligibility, others do not.

MYTH: “Dad and his new wife have a pre-nuptial agreement so we don’t have to worry about her assets being counted against Dad when he applies for Medicaid, right?”

THE TRUTH: To qualify for Medicaid, both spouses must disclose all of their assets regardless of existing marriage agreements, or separate or community property issues. Medicaid does not distinguish between separate and community property and prenups are irrelevant.

MYTH: “Mom’s Medicare will cover the nursing home bill.”

THE TRUTH: Medicare does not cover long-term care, only very short-term care. The maximum number of days covered by Medicare is extremely limited and generally does not cover custodial care. When the Medicare coverage stops, the patient will pay out-of-pocket unless they have private long-term care insurance or qualify for Medicaid benefits.

MYTH: “Mom can give away $15,000 per year to her children and grandchildren and still qualify for Medicaid.”

THE TRUTH: This is a rule under federal gift tax law, not under Medicaid law. Any gift or transfer may cause a Medicaid application to be rejected, and you will also be penalized!

Having clients obtain proper Medicaid planning can eliminate many problems that could otherwise occur. So, the best answer to give in the social setting is NOT the typical, “It depends.” The best answer is, “DON’T TRY THIS AT HOME!” AL