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Can my mother make gifts to her children and grandchildren and still qualify for Medicaid?

What I hear most often is “my accountant told me she can gift up to $14,000 to as many people as she wants and it is not counted. What they forget to say is that it is not counted “by the IRS”. It is true for income tax purposes, anyone can gift up to $14,000 to as many people as they want each year and not report it to the IRS. However. IRS rules don’t apply to Medicaid. In the eyes of Medicaid, every gift is counted. Small ones of $50 – $100 are usually overlooked, but the case worker has the authority to question any transaction, no matter how small. If the case worker determines that funds or other property were gifted, a penalty period will be applied when Medicaid is granted. The penalty period is calculated by totaling all of the gifts that were made within the 5 year look back period (which starts at the time of filing) and dividing the total by the average cost of nursing home care in her state or county (this is a published figure). The calculated result is the number of months that your mother will have to pay privately before Medicaid starts to pay. For example, if $108,000 of gifts were made during the past 5 years and the average cost of care is $9,000, the result is 12 months. You mother will have to pay privately for the next 12 months. And since she is eligible for Medicaid, she has no money! If all of the gifts are returned, the penalty is reversed and the returned gifts need to be spent down.

How does spend down work for a married couple?

Assuming one spouse needs long term care and the other spouse is healthy and living at home, there are allowances to protect the income and assets of the healthy spouse.

First, there is protection of resources. When the Medicaid spouse first enters a long term care facility, a snapshot is taken of the joint assets. The couple’s total assets are divided in half. The community (healthy) spouse can keep half of the assets up to the state resource limit. For 2014, the maximum, and most common, spousal resource limit is $117, 240 and the minimum is $23,448. It is easiest to demonstrate this with examples.

Let’s assume the couple has $200,000 in liquid assets (their home will be addressed in the next question). Splitting this in half, gives the community spouse $100,000 to keep. If the state resource limit for the Medicaid spouse is $2,000, the total amount that can be kept is $102,000. When the difference between $200,000 and $102,000, i.e. $98,000, has been spent, the long term care spouse will be financially eligible for Medicaid. The $98,000 can be spent on anything either spouse needs for healthcare, living expenses, home improvements, a car, prepaid funeral, etc. (Do not use this for something extravagant.) Most importantly, do not make any gifts!

Let’s assume the couple has $300,000 in liquid assets in the snapshot. Dividing this in half gives the community spouse $150,000. But, recall that the maximum spousal allowance is $117,240. Between both spouses they cannot have more than $119,240. In this case, the spend down is the difference between $300,000 and $119,240, or $180,760.

In the final example, let’s assume the couple has $40,000 in liquid assets when the snapshot is taken. Dividing this in half will leave the community spouse with $20,000, but the community spouse is entitled to keep a minimum amount of resources, depending on the state. If the state minimum is $23,448, $3,448 will be taken from the other half and given to her or him reducing the spend down before the Medicaid spouse is eligible.

The other variable is income. Typically, the community spouse’s income is not touched by Medicaid. (The exception is if the spouse’s income is higher than the state limit, some of her or his income may be allocated to the Medicaid spouse.) If the community spouse’s income is low and she or he cannot live on their income alone, an allocation is made from the Medicaid spouse’s income. Again, an example will make this clear.

Each state has a minimum monthly spousal allowance and a maximum monthly spousal allowance. The federal limits for 2014 are a minimum of $1,938.75 (with the exceptions of Alaska and Hawaii) and a maximum 0f $2,931. Let’s assume the Medicaid spouse has income of $2,000/month and the community spouse has income of $1,000/month. Since the community spouse’s income is below the minimum, his or her monthly income will be increased to at least $1,938.75 by taking $938.75 from the Medicaid spouse’ income. If the community spouse’s living expenses are greater than $1,938.75, the case worker has the discretion to increase the spousal allowance up to the maximum of $2,931, subject to need.

The Medicaid spouse’s income is given to the long term care facility less a state-specific Personal Needs Allowance, income allocated to the community spouse and health insurance premiums. This works the same for a single person. (Certain state waiver programs may use different calculations.)

How does spend down work for a single person?

In order to be eligible for Medicaid, each state has a maximum amount of resources (assets) that the applicant can own. The minimum and most common resource limit is $2,000. This takes into consideration all bank accounts, CDs, brokerage accounts, mutual funds, annuities, cash value life insurance, etc. If an account is an IRA (or 401(k) or 403(b)), depending on where you live, the state may count it as an asset or only count the annual distribution as income (note that they do not use the IRS RMD calculation; they use the Social Security RMD). All real property is counted as well unless the person or spouse is living at home. (However, they can attach a lien to the home to be collected whenever the house is sold.)

A prepaid funeral and/or burial fund is not considered a countable asset. Funds can be used as part of spend down to pay for these. One automobile of reasonable value is not counted as an asset. Personal belongings that are not of high value are not counted. Expensive items, such as a baby grand piano or expensive art work or jewelry do count.

Anything that is countable and can be liquidated must be liquidated and spent down until $2,000 or less remains (check with your state for the resource limit).

Medicaid eligibility cannot start until the first of the month after the resource limit has been met. (This assumes the clinical assessment has been completed.)

What happens to my father’s house when he moves to long term care and applies for Medicaid?

If your father is not married, the house must be put on the market at “fair market value”. In other words, they cannot force the house to be sold at an unreasonably low price. Usually, the case worker will request 3 independent market appraisals to determine fair market value. He or she will want to see the listing.

There are two exceptions to this rule. If a child of the Medicaid applicant lived in the house and took care of your father for at least 2 years, he or she may be able to keep the house. The child must prove that your father’s address was his or her permanent residence as well. A doctor needs to write a letter stating: because the child lived with and cared for the parent for at least 2 years, the parent was able to avoid going to a nursing home during this period. In other words, the child was able to delay the move to a nursing home for at least 2 years, saving the state the cost of care.

The other exception applies if a brother or sister of a Medicaid applicant jointly owned and lived in the same house as the Medicaid applicant for at least one year. The brother or sister need not have cared for their sibling, but he or she does need to prove that this was his or her primary residence for at least the year prior to Medicaid eligibility. If this is the case, the sibling can keep the house.

If your father is married, your mother (or his spouse) can keep the house without any liens being placed upon it. She or he has up to 90 days after Medicaid has been approved to transfer the title of the house to herself or himself. Once your father has been approved for Medicaid, your mother can sell the house and keep the proceeds for herself.

As a precaution, there are state limits that will cause the house to be a countable resource no matter who lives there. These are for expensive properties.

What is the difference between Medicare and Medicaid?

Medicare is a health insurance program for people 65 and over. It covers skilled care needs, such as hospitals, doctors, nurses, licensed therapists, etc. It does not cover custodial care, including activities of daily living (feeding, bathing, dressing, toileting, transferring and continence) or instrumental activities of daily leaving (cooking, cleaning, transportation, medication management, financial management, etc.). These are covered for people who qualify for Medicaid.

Medicaid is for people who need assistance and have depleted most of their financial resources. The criteria for assistance are needing help with at least 3 activities of daily living or requiring substantial supervision for cognitive impairment. The financial resource limit depends on which state the person lives in. In many states, the limit is $2,000.