Medicaid and Estate Planning

Medicaid and estate planning are two areas of law that intersect with each other in the lives of many families. Simple estate planning can include wills, trusts, healthcare directives and HIPAA forms. More complex estate planning can include trusts to avoid substantial state and federal inheritance taxes for those families who have assets that exceed the exemptions. It can also include trusts to handle assets for children or grandchildren who are too young and inexperienced to responsibly handle money or other assets. Everyone needs this type of planning.

Not everyone needs Medicaid planning. A young couple with children has very low risk of needing Medicaid. But a couple getting up in years, and whose kids have successfully flown the nest, or who have medical conditions that might need long term care such as dementia, or Parkinson’s disease, need to consider steps to protect assets in case Medicaid is needed. There are many ways to do advance planning to protect assets, but if giving away assets is a consideration, it is usually not wise to give money or your home directly to your grown children.

This is not because the children are not trustworthy or might waste money. It is because bad things happen to good children. If they are married, they could get divorced. Or they or their spouses could get sick and need long term care themselves. Or they could die and the assets you gave them go elsewhere. They could be the best children in the world, but they cannot control any of those things happening to them. For those reasons it makes sense, if parents are inclined to transfer assets to children during the parent’s lives, to put those assets into an irrevocable trust.

Trusts can avoid probate administration and will pass on the assets to the children or
grandchildren at a time the parents chose. Here is where estate planning can also be planning for Medicaid in case it is needed. An irrevocable trust, with specific tax provisions can keep all of the tax benefits a person has, such as a $250,000 capital gains tax exemption on the sale of a personal residence, and a step up in tax basis, at death, on real estate or stocks. Then the benefits of prior planning can be done without the risks of having property at risk in the name of children and grandchildren.

Another estate planning technique, if there is a risk of one spouse needing long term care, is to have the “healthy” spouse make a will with a trust inside the will. Since a will is only effective when the maker of the will dies, the trust does not come into existence unless the “healthy” spouse dies before the one needing care. If the healthy spouse dies first, the assets go into the trust and are instantly protected, even if the sick spouse is already on Medicaid. In Connecticut, Medicaid rules require the surviving spouse to take a portion of the deceased spouses estate. Almost everyone who has a spouse who is likely to need long term care should avail themselves of this tried and true estate planning technique.

It is not easy to explain all the pluses and minuses of the estate planning techniques, the Medicaid rules, and the different circumstances that can arise in different family’s situations. Age and health of spouses and children, size and kind of assets, and potential capital gains taxes and current and future need for long term care need to be taken into consideration. Like many decisions in life, getting complete and accurate information and acting on that information is vital to protect your assets, limit capital gains taxes, and keep your loved ones at home by getting home care paid by Medicaid. As a man in his 90’s said to me many years ago when I started our
conference by saying “If you die—”, he immediately responded a touch of humor, “Attorney Allaire, it’s not “if you die, it’s when you die.” A word to the wise from a man who lived a full and long life.