There has been a great deal of news coverage about Medicaid life settlements since our article on that topic two months ago.
During that time, Texas became the first state to enact such a law, and three more states — California, New Jersey and New York — have taken up consideration of Medicaid life settlements.
Based on the inquiries and comments we have received regarding this news, there appears to be a need to review the practical implications of these laws.
Consider this situation. You have a long-time female client who is 85 years old and in poor health. So poor, in fact, that she now requires full-time care. Although she retired reasonably comfortably years ago on a small pension, Social Security and modest savings, the cost of the care she requires has consumed most of her assets. However, she still owns a $100,000 universal life policy purchased almost 30 years ago that has minimal cash surrender value. She is contemplating entering a nursing home and applying for Medicaid assistance.
She would like to qualify for Medicaid so that her family does not have to pay her long-term care expenses. In order to qualify, however, she must dispose of the universal life policy. She has the four options below, and in all cases, the proceeds would need to be properly spent down before she could qualify for Medicaid:
Surrender the policy for its nominal cash surrender value.
This option would likely be the quickest way to qualify her for Medicaid. But it seems to be a terrible waste to allow this asset to go for just a nominal amount when her health indicates that it is likely to mature into a death claim in the very near future.
Attempt to sell the policy as a traditional life settlement.
Selling the policy in the traditional life settlement market is a long shot, as this market generally seeks larger face amount policies, usually at least $500,000. Although it is still worth a try, if she had a larger face amount policy, this might be a more attractive alternative.
Sell the policy to a family member for its fair market value.
Selling the policy to a family member for its fair market value could be the best alternative if a family member has the cash and the desire to own and maintain the policy. After all, if the policy would be an attractive investment to a life settlement investor, it would surely be attractive to a family member, even if the death proceeds would become income taxable under the “transfer for value” rules.
Caution must be exercised in using this approach, as the IRS and Medicaid will both want to verify that the policy was actually sold for its fair market value, which, given the insured’s health, could be much greater than the surrender value. Additionally, the proceeds of the sale would have to be used up before she could qualify for Medicaid. However, this approach does provide flexibility in how the sales proceeds could be used, so long as the Medicaid qualification rules were not violated. Finally, the family member who purchased the policy could benefit substantially from the death proceeds.
Try to sell the policy as a Medicaid life settlement.