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Financial Planning > Trusts and Estates > Estate Planning

Will Your Client’s Medicaid Trust Survive the Move to Florida?

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What You Need to Know

  • Medicaid has become a main source of funding for nursing home care for many Americans.
  • Before Medicaid assistance becomes available, however, most clients are required to spend most of their assets.
  • There are strategies that can be used to preserve the family home, but clients who want to move must be mindful of varying state laws.

Given the rising costs of long-term care, Medicaid has become a key source of funding for taxpayers in need of nursing home care. However, Medicaid coverage is only available to taxpayers with limited resources who satisfy certain means-based tests. Before Medicaid assistance becomes available, most clients are required to spend most of their assets to cover the cost of care — something that comes as a surprise to many.

Clients who have yet to experience the need for Medicaid-funded long-term care may be reluctant to engage in planning due to the sensitive nature of the topic. Those clients should be advised that it may be necessary to act several years before the need for long-term care arises — especially if the client wishes to preserve their family home for future generations — and that state trust requirements can affect the validity of any Medicaid transfer if the client decides to move to Florida.

Medicare Eligibility Basics

Preserving the family home is often one important issue in Medicaid planning. One complication that often arises in situations involving married spouses is that while one spouse may require care in a nursing facility, the other spouse may be healthy enough to continue living in their primary residence.

In these cases, the value of the primary residence is not counted in determining whether the other spouse qualifies for Medicaid coverage. On the other hand, once the healthy — or “community” spouse — also requires care in a facility or passes away, the value of the primary residence will be considered a resource that can be used to help offset the cost of nursing home care.

Once the primary residence is considered a resource, of course, it can be liquidated or subject to a lien to cover the cost of Medicaid benefits that have already been paid.

Planning to Preserve the Family Home

There are, of course, strategies that can be used to preserve the family home. There are two primary options for retaining control of the family home. The first is to actually transfer ownership to a third party (typically, a child or grandchild), while retaining a life estate.

The life estate gives the client the right to continue to live in and control the residence for life, while removing the residence from the available pool of resources for Medicaid purposes (note that given strict legal interpretations that apply in many states, this strategy typically only works where the home is the client’s primary residence).

The second option is to transfer ownership of the home into an irrevocable trust for the client’s own benefit. Again, the client retains full rights to occupy and use the home, while removing it from the pool of Medicaid-considered resources. However, if the house is later sold, proceeds must remain in the trust and the client or beneficiary has only the right to income from the trust.

Also, depending on state law, it’s possible that the state could seek reimbursement from the trust after the client has died and no qualified relatives remain living in the residence. Clients must be aware that state-specific laws can affect the validity of a Medicaid trust planning strategy — meaning that clients must reevaluate the terms of their current trust before making the move to Florida.

While in some cases the original trust may continue to be valid under Florida state law, there are state-specific laws that must be respected for the planning strategy to remain in place. Clients considering making the move should be aware that, for example, the ability of individuals to act as fiduciary for estates is more restrictive in Florida than in New York and that specific language that references the Florida statute must be included in the power of attorney.

While these are both valid (and legal) Medicaid planning strategies, they must be executed well in advance for the strategy to work. Medicaid regulations contain a five-year lookback rule. Any transaction will be scrutinized if entered into within the five years prior to the date the client submits a Medicaid application. Any conveyance of assets (including via the trust strategy) could subject the client to a penalty period (assuming that the home was transferred for less than fair market value).

The “penalty” is that no Medicaid benefits will be available during the period when the penalty applies, so that the client will be responsible for funding their own nursing care.

There are exceptions to the rule. If the transfer is to a spouse, or a child who is under 21 years of age or has been certified blind or disabled, no penalty will apply, and the client remains eligible for Medicaid coverage. Similarly, if a sibling has an equity interest in the property, the penalty will not apply if the sibling has resided in the home for at least one year. Adult caretakers who have resided in the home for at least two years while providing care to the client can also receive a gift of the property without triggering the penalty.

Conclusion

Transfers made to protect assets and preserve Medicaid eligibility can have a variety of tax consequences. Before entering any strategy or before moving to different states, it’s always important that the client consult their attorney so that they understand the potential implications of the transaction.


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