Something that comes up frequently with regard to estate planning is a discussion around protection of assets from nursing homes and medical assistance or Medicaid. I preface this by saying I am not an attorney and do not provide legal advice. I always recommend consulting your attorney before making any decisions.
But I wanted to list some of the strategies families can utilize to help protect their assets from Medicaid in the case that nursing care is needed and payment is not feasible, or protection of assets is desired.
1) Long-term care insurance: Long-term care is used to fund nursing home stays, assisted living, and adult daycare expenses. There are many different coverage options provided by long term care policies. Long-term care policies can cover some or all the cost of nursing care so that your assets are not depleted or taken by the state in the event of nursing care costs or medical assistance.
2) Irrevocable trusts: Once you place assets into an irrevocable trust, they are no longer yours. This means you can’t make changes to this trust or take back any assets. But this also means they are not counted as your assets for Medicaid purposes either. However, the Medicaid 5 year-look back rule may still apply with transfers to irrevocable trusts.
3) Life Estate: A life estate is a legal entity that holds real estate, such as a home. There are two parties in a life estate, the “lifetime tenant” and the “remainderman”. In a life estate, the "lifetime tenant”, usually an older person, is allowed to continue living in the home until they pass away. They no longer own the home outright but have right to possession to stay there until they pass. Then after their death, the home would pass on to whoever is the “remainderman”. Often, this would be a family member such as a child. Since they no longer own the home, the Medicaid program can’t count it toward eligibility and the state can’t put a lien on it. So, this can be a consideration when looking to protect the home from medical assistance. Another advantage here is that the “remaindermen” or beneficiaries may still receive a step up in basis to the fair market value of the property at the date of death of the “lifetime tenant”. I recommend consulting your tax advisor when discussing tax law.
4) Gifting: The gift tax exemption has very high limits. In 2024, the annual gift tax limit is $18,000 per recipient and $36,000 for married couples. For example, a married couple can gift one child up to $36,000 in 2024 without having to file a gift tax return. If you exceed the annual gift tax limit, you may have to file a federal gift tax return. But exceeding this limit doesn’t necessarily result in owing tax thanks to the lifetime gift tax exemption. In 2024, you can gift up to $13.61 million (double for married couples) over your lifetime tax-free per recipient. So, a single person can gift up to $13.61 million to one child over their lifetime without paying any gift tax. As with other transfers, the Medicaid 5-year look back rules apply to gifting as well.
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