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Protecting Your Assets from Medicaid Estate Recovery

Medicaid estate recovery happens when states try to recoup expenses from a care recipient’s estate. These steps can help prevent this from happening to you.Medicaid estate recovery happens when states

Reviewed by
Kate Grayson

After anyone passes away, their estate is generally responsible for paying off their debts before the remaining assets are distributed to beneficiaries. Though there are ways around this, the general rule is that an estate will need to pay off all debts (e.g. loans, bills, etc.) as long as there is money available in the estate. 

What is Medicaid estate recovery? 

For many people, health care is the largest expense later in life. Medicaid provides assistance with medical coverage and costs to people with lower incomes. What many people don’t realize is that Medicaid fundamentally considers this a loan to be repaid when you pass away if your estate has the assets available. 

When a Medicaid recipient passes away, states are required to attempt recouping Medicaid’s caregiving expenses from the recipient’s estate. The state acts as a creditor in an attempt to receive their Medicaid costs back. This is called Medicaid estate recovery. 

States are not allowed to recover assets from an estate when there is: a living spouse, a child under age 21, or a child of any age who is blind or disabled. 

Protect Your Estate with an Asset Protection Trust

The most common way to protect your assets from Medicaid estate recovery is through the creation of an asset protection trust (also known as a Medicaid five-year trust or Medicaid irrevocable trust). This is a specialized trust that differs from a standard revocable living trust that you may already have in place which will not protect your assets from Medicaid estate recovery.

This trust requires advance planning in order to avoid the penalties associated with Medicaid's five year look-back period. The look-back period allows your state to research your last five years of financial transactions to ensure that no improper transfers of assets took place that would disqualify you from Medicaid benefits. Because of this, it is essential to practice proactive financial planning. Do not wait until you or your care recipient are in need of long-term care until you begin planning or else you will not be able to take advantage of the asset protection trust without impacting Medicaid eligibility.  

With an asset protection trust, the asset holder (called the “trustor,” “grantor,” or “settler”) who anticipates using Medicaid for long-term care costs can set up this trust to protect assets. If the grantor does not need Medicaid long-term care for the next five years (or has the funding for private pay), then the assets placed in the asset protection trust will not be included in Medicaid’s eligibility calculation. As long as you plan at least five years in advance, the assets in the trust will be safeguarded from Medicaid estate recovery and passed onto the rightful beneficiaries once the grantor passes away.  

In order to set up the trust, you will need at least one trustee — the person/people who manage the trust. This cannot be the grantor or their spouse. The trustee does not have to be the same people as the beneficiaries, but since the trustee(s) will control the assets inside the trust it is important that it be somebody you trust. The grantor is entitled to change the trustees and beneficiaries at any time. 

After an Asset Protection Trust is in Place

Once the trust is established, the grantor is able to continue living in their house that was put into the trust; but, technically, the trust now owns it — not the grantor. The grantor is also entitled to receive any income generated from the assets in the trust. However, be careful, as Medicaid eligibility also has income limits. If there is high enough income, it could necessitate the creation of a Medicaid income trust (also known as a Miller Trust or Qualified Income Trust). 

The Trust becomes its own separate legal entity, and its assets are no longer tied to you. Therefore, when you pass away Medicaid will have no jurisdiction over your trust’s assets and no way to collect debts through Medicaid estate recovery. As long as you create this trust at least five years before you require Medicaid, your assets should safely pass onto your beneficiaries.

A Note on Estate Planning

Many individuals can expect to live past an age where they’ll be able to live independently at home. Even for those fortunate enough to have family caregivers, there can come a time when one’s health necessitates being in a facility. Long-term care is incredibly expensive with a median cost in Florida of $48,000 per year for a private room in a long-term care facility. That is, obviously, prohibitively expensive for most families. As a result, many families rely on Medicaid; Medicaid pays for approximately 60% of long-term care costs.

Medicaid estate recovery leaves many families vulnerable. It is common to think that estate planning is only a requirement for wealthy families. However, if you own your home and want it to be passed on to your family, then proper planning will protect it from Medicaid estate recovery.

Proper estate planning will protect your assets for your beneficiaries, but it can be complex and the intricacies can vary by state. As such, we always recommend working with an attorney. Please use this article as educational information only. 

Photo by Jessica Bryant from Pexels

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