Protecting assets from Medicaid estate recovery

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 (loans, bills, etc.) as long as there is money available in the estate. 

What is Medicaid Estate Recovery? 

For many people, healthcare 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. 

Note: 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. 

Why it is Relevant to You 

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 will necessitate 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. It is important that this planning be done as early as possible – so please don’t wait until you’re moving into a long-term facility to begin planning financially and legally. 

Estate planning is very complex, and we always recommend working with an attorney. There are a lot of intricacies that vary state by state, so please don’t take this as legal advice. However, it’s important to have the knowledge to advocate for yourself and understand your legal decisions, which is how we recommend this article be used.

Note: a standard Revocable Living Trust does not protect your assets from Medicaid Estate Recovery.

How Can You Protect Your Estate?

The most common way to protect your assets from Medicaid Estate Recovery is through the creation of a “Family Asset Protection Trust” (also known as a Medicaid Five Year Trust or Medicaid Irrevocable Trust). This is a specialized trust that’s very different from a standard Revocable Living Trust that you may already have set up. This Trust requires advance planning, in order to avoid the “Medicaid Five Year Lookback Period.” The Lookback Period allows your state to look back at the 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 Family Asset Protection Trust, without impacting Medicaid eligibility.  

With a Family Asset Protection Trust, the asset-holder who is anticipating using Medicaid for long-term care costs can set up this Trust to protect assets (they are called the “trustor,” “grantor,” or “settler.”) 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 Family 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 (i.e. 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 Trustees 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. 

How Will This Impact Me?

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. But remember: proper estate planning is complex and individual, and is best done with an attorney. Please use this article as educational information only. 


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