Understanding Medicaid Crisis Planning for Long-Term Care
Most individuals over the age of 65 will require some form of long-term care during their lifetime—statistics show that around 70% of seniors do. Elder law helps individuals and families prepare for this possibility by developing strategies to fund care without depleting all personal assets.
One of the key components of elder law planning is understanding how Medicaid, the primary public program that pays for long-term care for non-veterans, works. Medicare, by contrast, offers only very limited coverage for short-term nursing home care.
How Medicaid Eligibility Has Changed
Before the Deficit Reduction Act of 2005, qualifying for Medicaid long-term care benefits was relatively straightforward. Since then, however, the rules have become significantly stricter. Today, careful planning is essential to protect assets and qualify for benefits.
Proactive vs. Crisis Planning
The most effective approach is to plan early—ideally, at least five years before care is needed. This allows an elder law attorney to implement strategies that can preserve most, if not all, of a client’s assets.
When no early planning has occurred and care is urgently needed, the situation becomes one of crisis planning. In these cases, legal strategies are more limited, but with the right guidance, some asset protection is still possible.
Medicaid Eligibility Requirements
To qualify for long-term care Medicaid, applicants must meet the following criteria:
- Medical Test: The individual must require a nursing home level of care.
- Income Test: Income must be less than the private cost of care. Most of the applicant’s income will need to be paid toward care costs.
- Transfer Test: Transfers of assets for less than fair market value within the five-year “look-back” period will result in a penalty.
- Asset Test: Countable assets must fall below state thresholds—commonly $2,000 for individuals, and between $30,828 and $154,140 for married couples with one spouse applying.
Crisis Planning Strategies to Reduce Countable Assets
When a client needs immediate care but has not pre-planned, elder law attorneys turn to various legal tools to reduce countable assets and qualify the client for Medicaid.
- Spend Downs and Exempt Purchases
Spend Down Strategies:
Spending money on necessary goods and services in exchange for fair market value is not penalized. This could include:
- Medical equipment (e.g., wheelchair)
- Paying off debts
- Home repairs
Purchasing Exempt Assets:
States exclude certain items from Medicaid asset calculations. Purchasing these items can effectively reduce countable assets. Common exempt assets include:
- One vehicle (any value)
- Irrevocable burial contract
- One burial plot per family member
- Life insurance with cash value up to $1,500
- Household goods and personal effects
- Exempt Transfers
After necessary spend downs, assets can be transferred penalty-free to certain individuals:
Primary Residence Transfers (per 42 U.S.C. § 1396p(c)(2)(A)) can be made to:
- A spouse
- A child under 21
- A child who is blind or permanently disabled
- A sibling with an equity interest who lived in the home for at least one year
- A caregiver child who lived in the home and provided care for two years prior to institutionalization
Other exempt transfers can include funding certain types of trusts.
- Sole Benefit Trust (SBT)
Authorized under 42 U.S.C. § 1396p(c)(2)(B), this trust can be used to benefit:
- A spouse
- A blind or disabled child
- A disabled individual under age 65
The trust must:
- Benefit only the named individual
- Use funds on an actuarially sound basis over the beneficiary’s life
- Sometimes include a payback or estate clause, depending on state requirements
- Self-Settled Special Needs Trust (d4A Trust)
This trust is funded with the applicant’s own assets and is exempt from penalty if:
- The applicant is under age 65 and disabled
- It includes a Medicaid payback provision to reimburse the state upon the applicant’s death (per 42 U.S.C. § 1396p(d)(4)(A))
- Promissory Note or Annuity Planning
These tools can be used to convert countable assets into non-countable income or protected funds.
Promissory Notes must:
- Be actuarially sound
- Have equal payments
- Prohibit cancellation upon the lender’s death
Annuities must:
- Be irrevocable and non-assignable
- Be actuarially sound
- Pay equal amounts
- Name the state as the remainder beneficiary
Note: Each state interprets these rules differently—some allow promissory notes, others annuities, and a few allow both. An elder law attorney must be familiar with local Medicaid rules to apply the appropriate strategy.
Example Use:
- A lump sum is split: half is transferred to a trusted individual (creating a penalty), and half is loaned or annuitized to pay for care during the penalty period. For married couples, annuities can help preserve income for the community spouse under the “name on the check” rule.
Why Early Planning Matters
While crisis planning can still preserve some assets, proactive Medicaid planning offers the most protection and peace of mind. Clients who plan ahead can often preserve the majority of their estate, ensuring more security for themselves and their families.
Each case is unique. The elder law attorney must evaluate the client’s marital status, available exempt recipients, applicable state laws, and the nature of the assets involved to craft a suitable plan.
These legal topics are provided to you by the President of QMC, Mark Easley. While QMC does not engage in the practice of law, Mr. Easley has practiced estate planning and elder law for over 30 years and is currently the principal at the Elder and Estate Planning Law Firm of St. Louis.