My sister inherited $350,000 from her father’s estate, but her husband was diagnosed with dementia. Should they divorce so he can qualify for Medicaid?
Dear Quentin,
My sister inherited money (approximately $350,000) from my father’s estate. Her home has always been in her name only, and it was not commingled with her husband’s finances.
Her husband has early signs of dementia and wants her to get a divorce so that if he needs to go on Medicaid to pay for a nursing home, she doesn’t lose the money from my father.
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She owns the home in her name only, and has a pension and Social Security. He has a 401(k) and Social Security. They live in Colorado.
Will Medicaid force her to spend down her inheritance to pay for nursing home care even though they will be divorced long before he applies for Medicaid?
Trying to Help
Dear Trying,
Divorce is an extreme solution to a problem that requires careful consideration and planning. Timing is as critical as assets and income when evaluating whether or not you or your spouse qualify for Medicaid. What’s more, it’s a highly individualized dilemma.
In Colorado, a prospective Medicaid recipient’s 401(k) and IRA are countable for eligibility, although rules vary by state. A person’s home is generally exempt as long as it is a principal residence your equity does not exceed $1,071,000. In this case, however, the home in question is owned solely by the spouse. (You can see more on eligibility in Colorado here.)
Other exemptions, according to the Denver-based Hughes Law Firm, include “one car if the car is used for employment, used to obtain medical treatment or is handicap-equipped.” Personal property used as investments ― like artwork ― may not be exempt, but clothing, furniture, wedding rings etc. are usually exempt.
“Dementia is a challenging and unpredictable illness, so to plan financially, it is important to know what services — home based, day programs and in-patient or residential programs — may be available,” says Patricia Tobin, a certified elder law attorney based in San Rafael, Calif., and fellow of the National Academy of Elder Law Attorneys.
Laws vary by state
For married spouses where the non-applicant spouse receives an inheritance, it will likely have “no impact” on their eligibility in Colorado, according to the American Council on Aging. However, rules vary by state and there is no federal statute that says a “well spouse” can accept an inheritance and that money will not be considered when establishing Medicaid eligibility, Tobin says.
There are other key aspects to the rule governing Medicaid, income and assets held by your sister: If you are a Medicaid recipient and receive an inheritance, you must report it to your state Medicaid agency. Generally, this should be reported within 10 calendar days. Inheritance paid solely to your sister will likely not be counted 90 days after Medicaid eligibility is approved; but if the inheritance is commingled with joint assets, that will obviously affect her husband’s eligibility.
The type of care your sister’s husband needs is also critical. Until the patient is medically suitable and passes the pre-admission screening and resident review (PASRR) process as being suitable for a nursing home, they might not qualify for admission to a nursing home, Tobin adds. Bottom line: seek the help of an attorney, preferably one who is a member of the National Academy of Elder Law Attorneys Home or National Elder Law Foundation.
Medicaid is a needs-based program. To be eligible, he must have no more than $2,000 in countable assets, which includes bank accounts and investments, and $2,829 a month in income. There is a five-year Medicaid look-back to review whether the individual divested themselves of assets in order to qualify for benefits.
Transfers will be considered with a five-year look-back, Tobin adds, but the ineligibility period or the penalty is not automatically five years, it depends on how much and when the transfers were made. There are also exceptions to the five-year look-back rule: Those include paying off debts, buying medical devices and making home renovations to improve accessibility.
Rules on a primary residence
Other states, including Florida, New York and California, have rules that exempt a primary residence from assets calculated by Medicaid under certain circumstances. In Colorado, as in many states, you or your spouse need to live in the home or have plans to return to it (if it’s empty) if you wish the property to remain exempt from Medicaid.
While one’s home is generally not counted towards Medicaid’s asset limit, it is not exempt from Medicaid’s Estate Recovery Program, the American Council on Aging says. “After a Colorado long-term-care Medicaid beneficiary’s death, the state Medicaid agency attempts reimbursement of care costs through whatever estate of the deceased still remains. This is often the home.”
“Without proper planning strategies in place, the home will be used to reimburse Medicaid for providing care rather than going to family as inheritance,” it adds. In your sister’s case, the home belongs to her alone. So she should contact a trusts and estates attorney before making any decisions.
Setting up an irrevocable trust
Some people plan ahead by establishing an irrevocable trust — before the five-year look-back rule. “By transferring your assets into an irrevocable trust, you effectively remove them from your ownership. This would render them exempt from Medicaid,” says The Hughes Law Firm. (Alternatively, you could give them to adult children — a last resort.)
A Medicaid Asset Protection Trust (or irrevocable income-only trust) can protect the assets of a person who wishes to apply for Medicaid, as long as this is done before the look-back period. You can include stocks and bonds, bank accounts and CDs, secondary properties (vacation homes and rental homes). With a MAPT, you are giving up control of these assets.
However, Medicaid-related trusts can be very problematic, Tobin, the California-based attorney, adds. “While effective in some cases, they are often challenged by Medicaid agencies and, more importantly, fraught with title, tax and other problems that often outweigh the putative Medicaid benefits.”
Jack Elder, senior vice president of Advanced Markets, CBS Brokerage, says your sister’s case is a cautionary tale. “It’s advisable to explore long-term-care insurance options before cognitive impairment becomes a concern. This can play a crucial role in providing financial support for individuals who develop dementia or other long-term cognitive impairments.”
That’s too late for you, but not too late to make other plans.
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