A 2014 Medicaid Update

Countable vs. Non countable Assets and Last Minute Techniques On

How Not To Impoverish Your Spouse


Cushing & Dolan, P.C.

Attorneys at Law

375 Totten Pond Road, Suite 200

Waltham, MA 02451

Tel: 617-523-1555

Fax: 617-523-5653




Todd E. Lutsky, Esq., LL.M


Planning for the Single Person – Assets at Risk: All assets over $2,000             

Joint Bank Accounts
Investment Accounts
IRAs, 401(k)s, Roth IRAs, etc.None
Life Insurance
Vacation Homes & Rentals


Planning for the Married Couple – Assets at Risk: All assets over $117,240

Joint Bank Accounts                       $117,240
Investment AccountsCommunity Spousal Resource Allowance
IRAs, 401(k)s, Roth IRAs, etc.
Life InsuranceThis is the maximum mount a Healthy spouse is allowed to keep prior to the sick spouse entering a nursing home, in addition to retaining the primary residence.
Vacation Homes & Rentals


Countable and Non-Countable Assets Explained

Pension Plans or 401(k) Plans:

  •  An IRA and a Keogh plan are considered countable assets in their entirety less the amount of any penalty for early withdrawal unless the Keogh plan was established for employees other than the spouse of the applicant or member. The problem is that the healthy spouse’s IRA is countable when the sick spouse enters the nursing home.
  • A pension plan, better known as a 401(k) plan, is treated differently. A pension fund set aside by an individual’s current employer is not a countable asset. Pension funds from an individual’s former employer are countable in their entirety (less any penalties for withdrawal) provided such funds are accessible.
  • Caution/Problem: If a person has left their job and rolled over their old, long-time, 401(k) into the new account then the old account is countable because it is not the current employers 401(k). Unfortunately, this exception is not very helpful since it is very rare that one spouse enters a nursing home while the other spouse is still working. Remember this 401k type asset is only protected if it is a benefit provided by the healthy spouses’ current employer.

Life Insurance Policies:

  • Whole Life or Universal Life Insurance: If you have this type of life insurance in place and the face value of the policy exceeds $1,500 on the date of admission to the nursing home then the cash surrender value of the policy will be considered a countable asset. In addition, if you have multiple policies in place and the face values when added together, exceed $1,500, then the total cash surrender value of the polices (as of the date of admission to a nursing home) are considered countable assets.
  • Problem: Your countable life insurance policies would need to be liquidated even though the death benefit may be worth hundreds of thousands of dollars just to get the cash value, otherwise it will disqualify the individual for Medicaid for such individual can only have 2,000 of total assets before Medicaid eligibility will be approved. Remember, this life insurance policy may have been put in place to help the healthy spouse maintain their standard of living following the death of the spouse who may have had a pension that was set up to laps upon such persons death.
  • Term Life Insurance: With regard to term insurance, since it does not have a cash surrender value, it really has no value as of the date the individual enters the nursing home thus it is deemed as a non-countable asset. In addition, term insurance generally has a designated beneficiary directly where the proceeds go upon death of the individual, therefore it avoids probate, thereby avoiding the MassHealth (estate recovery) provisions.
  • Problem: While term insurance may not be a countable asset for Medicaid eligibility purposes, it is hard to maintain as the premium payments must still be made and generally there is not a lot of extra money available to make such payments when a person is in a nursing home and trying to become eligible for Medicaid. Generally the children or the healthy spouse will have to maintain the policy.
  • Planning Pointer: Always change the designated beneficiary on either of type of the policy to be the Medicaid Trust. If you are married this will help to reduce your potential estate tax liability.   However, in order to protect a whole life or universal life insurance policy from the cost of long term care you would need to change the owner to the trust as well. Furthermore, you can only do this if the policy is paid in full or it there is enough money in the trust to cover any future premium payments; otherwise, every time you make a premium payment on a policy that you no longer own you would be creating a new five year look back period for Medicaid eligibility purposes. A more complete explanation of the look back period and how it works is provided below.

Joint Accounts of All Kinds for Married Couples:

  • All joint accounts between married couples, whether they are bank or investment accounts, are considered countable in their entirety.
  • Planning Pointer: This form of ownership however may result in the payment of unnecessary federal and state estate taxes by the surviving spouse, because all the assets upon the death of the first spouse would pass to the surviving spouse via the unlimited marital deduction thus wasting the first spouses’ exemption amount. This exemption amount is the amount of assets a spouse can pass to the next generation without paying any estate tax. This amount is currently $5,340,000 at the federal level but only $1,000,000 here in Massachusetts. While a complete discussion of estate planning is beyond the scope of this article, suffice it to say, the use of revocable or irrevocable trusts, instead of joint ownership, can double the above amounts for a couple thus leaving that amount to the family estate tax free. Even though the federal exemption appears to be high, remember the Massachusetts exemption is only $1,000,000. Advanced trust planning could still allow up to $2,000,000 of assets to pass federal and state estate tax free to the family.

Joint Investment Accounts for Single People:

  • Any asset, other than a joint bank account, jointly owned by two or more non married individuals, for example an investment account joint with a child, is presumed to be owned in equal shares and counted proportionately, unless a different distribution of ownership is verified. In other words, one half of a joint investment account with a child is deemed protected from the nursing home. However, there is some question as to how long the account needs to be in existence prior to the sick joint owner applying for Medicaid.
  • Planning Pointer: if you have a joint investment account with a child, one half of the investment account would not be at risk upon admission to the nursing home and that child could take half the account during the time the other joint owner is applying for Medicaid eligibility. Caution, this account could not be set up right before applying for Medicaid as it may be viewed as a disqualifying transfer subject to the five year look back rule. However, there does not appear to be a time frame given as to how far in advance this type of brokerage account needs to be established prior to entering a nursing home to avoid the five year look back rule. This author is aware of an account being set up one year before the admission to a nursing home. That applicant was successful in avoiding the five year waiting period and protected half of the account. However, when such an account was set up two months prior to the individual applying for Medicaid benefits the individual was denied and the establishment of the account was considered a disqualifying transfer and resulted in a five year waiting period. There appears to be little downside to simply establishing a joint brokerage account if you are facing a nursing home situation in the near future, prior to the expiration of the five year waiting period. This technique may enable you to protect some of the assets from nursing home costs.

Joint Bank Accounts if Single:

  • When the applicant or member is a joint owner of a bank account with a child, the entire amount on deposit is considered available to the applicant for Medicaid eligibility purposes. If the applicant claims partial ownership of the funds he or she must verify the amount owned by each joint depositor. When such a partial ownership is verified, then only that portion of the assets is considered countable for nursing home purposes.
  • Caution: Please do not make the common mistake of thinking that just because a child’s name has been added to a bank account, one half of the account is protected from the nursing home. It is not. The government knows that most of the time these accounts are established for convenience purposes only and that the child has generally not contributed any money to this particular account.

Primary Residence Married Couples:

  • The general rule is that the primary residence, if located in Massachusetts, and if a spouse is living in the home, will be a non-countable asset for Medicaid eligibility purposes with respect to the sick spouse. In addition, the state would also not be able to place a lien on the property while the spouse is living there. If, on the date of admission to a nursing home the home is owned jointly, it should not be left this way. This is because if the healthy spouse were to die prior to the sick spouse, the home would automatically transfer to the surviving, yet institutionalized, spouse and be at risk for the costs of the nursing home. It is important to transfer the home out of the sick spouse’s name and to the healthy spouse as soon as possible. This transfer to the healthy spouse can take place even before the sick spouse has been approved for Medicaid benefits as transfers between spouses are considered permissible transfers and are not subject to the five year look back period. Finally, it is important to plan to protect the home after the sick spouse has been approved for Medicaid as the home will remain at risk if the healthy spouse were to need nursing home care in the future.
  • Planning Pointer: while this is a last minute technique to save the home for the healthy spouse, it remains important to plan to protect the home after the sick spouse has been approved for Medicaid as the home will remain at risk if the healthy spouse were to need nursing home care in the future. The best way to protect the home for the family and ensure the community spouse can continue to live there, is by transferring it to an irrevocable Medicaid trust. While this transfer will take five years to completely protect the home, it will not have any impact on the institutionalized spouse’s eligibility for Medicaid benefits. However, please do not make this transfer until after the sick spouse has been approved for Medicaid benefits; otherwise this transfer will result in a disqualifying transfer by the sick spouse and prevent Medicaid eligibility.
  • Caution: Please do not just add a child’s name to the home or transfer it to a child all together. This will result in a loss of control for the healthy spouse, exposure to the kids’ creditors, including divorces, while the healthy spouse is alive. Additionally, there are potential adverse income and gift tax consequences attributed to such a transfer.

Primary Residence a Single Person:

  • The general rule is that the home and appurtenant land, if located in Massachusetts, (or located in the state you are applying for benefits) is considered a non-countable asset as long as the applicant checks a box on the Medicaid application indicating that he or she intends to return home (even if that is not likely to happen). However, the state will be able to place a lien on the property once they determine that there is no reasonable expectation that the applicant will return home. This means that the state will be able to pursue the property following your demise in an effort to recover some or all of the benefits that the applicant received during life. This is known as estate recovery which can generally result in the home being sold to pay back the state.
  • Caution – Home exemption limitation and House Bill 6300: It is important to note that when the home equity exceeds currently $814,000 (indexed for inflation), the home will no longer be a non-countable asset. The exception to this rule is, if a spouse is living there, a blind or permanently disabled child is living there. In these cases the home can have any value and still be protected as discussed above. Finally, House Bill 6300 is proposing to lower this exemption amount to $50,000. This makes advanced planning more important than ever. If the home is transferred to a Medicaid irrevocable trust and five years expires, the home or vacation home will be protected from the costs of nursing homes regardless of its value.
  • Planning Pointer: Remember, while the home will not be countable currently, a lien will be placed on the home right away for the amount of the assistance that the state is providing to the applicant each month. However, the benefit of applying for Medicaid assistance and allowing the lien to be placed is that once Medicaid is obtained, the Medicaid rate will apply. This means that instead of paying the average private pay rate of approximately $12,000 per month, the individual will obtain the Medicaid rate of approximately $6,000 per month. This can provide a significant amount of leverage in terms of how much will be owed to the state when the individual passes away which may in turn allow the family to save the house.

Caution: Selling the home out of fear to pay the nursing home may not be the best solution.

Example: Use of a Lien as a Planning Tool:

Mark is a single person who entered the nursing home and sold his home for $300,000 in order to pay for nursing home care at the private pay rate. Mark’s nursing home costs $12,000 per month, or $144,000 over the course of one year plus the cost of medications. This means that the money will last approximately 25 months. Sue, however, is at the same nursing facility and chose to keep her home. She applied for Medicaid, knowing a lien will build against her home but at the Medicaid rate of $6,000 per month, or $72,000 over one year, reduced by whatever income Sue has each month. By applying for Medicaid Sue has saved over $72,000 per year and has kept her home thereby allowing it to build equity while she is in the nursing home. If Sue lives for the same 25 months as Mark and then passes away, Mark’s assets would be completely gone but Sue will still have the home with a lien on it for $150,000 (72,000 x 25 months). The family would now at least have a choice to buy it for the $150,000 lien amount or sell it, pay off the lien and keep the rest of the proceeds. Assume the property appreciated a little over the 25 months and it was sold by the family for $316,000, the family would have saved $166,000 whereas Mark would not have been able to save anything for his family. Finally, assuming Sue had social security and a pension totaling $3,000 per month then the lien amount would have been cut in half. Please do not just hurry up and sell the house because that is what the nursing home said to do. Instead seek legal counsel as to the next possible steps.

Vacation and Rental Properties for Married and Single People:

  • These are countable assets and will prevent the institutionalized individual from becoming eligible for Medicaid benefits. Typically the state will place a lien on these properties and then force you to sell them in order to use the proceeds as reimbursement for your nursing home care. This is why advanced planning through the use of irrevocable trusts is essential in order to save these family lake or cape vacation properties.
  • Planning Pointer: Even if no advanced planning was done you can still try to rent out the vacation home and, of course, if the rental property is already rented out, as long as it is generating income essential to self-support, the state will allow you to keep the property and

deem it to be non-countable for Medicaid eligibility purposes. However, the state will place a lien on the property in case it is sold during your life and it will be there so the state can recover the benefits paid out following the death of the applicant. This is known as Estate Recovery. Remember, the rent will be used to offset the Medicaid benefits thereby reducing the lien. In addition, being on Medicaid is better than private paying since the Medicaid rate is around half the cost of private paying the nursing home which in turn helps to save these properties by significantly reducing the amount of the outstanding lien coupled with the incoming rental income, as shown above in the lien example. However, nothing really beats advanced planning. By placing these properties into a Medicaid irrevocable trust the assets would be protected after five years following the transfer, and no lien could be placed on them. Finally, these trusts are also designed to keep you in control and continue to enable you to enjoy all of the rental income just like you did prior to putting the property into the trust.

Example: Jim owns a residential property that he rents out, but Jim is sick and now required to enter a nursing facility. Jim’s property is a three family in Somerville worth about $600,000. He rents out all three units for a total of $6,000 in income each month, or $72,000 per year. Jim’s property taxes are $10,000 a year, his homeowner’s insurance is $5,000 a year, he does not pay for the tenant’s heat or utilities, but he does spend $15,000 a year to maintain the property. In order to calculate how much Jim would need to pay the nursing home, we would take the total yearly rental income, $72,000, and subtract this by yearly expenses, $30,000, leaving a total of $42,000 in rental income each year to be paid to the nursing home, or approximately $3,500 each month. Finally, assume Jim has social security income of $1,500 per month, which would also go to the nursing home, for a total of $5,000 per month to the nursing home thereby further reducing the lien amount.

This rental payment reduces Medicaid’s monthly care contribution by the same monthly amount, thereby reducing any lien on the property by $42,000 per year plus the social security payment for a grand total reduction in the lien amount of 60,000 per year. In other words, the nursing home would be receiving a total of $5,000 ($3,500 net rent + $1,500 social security) per month. Let’s assume the Medicaid rate for the nursing home is $6,000 per month; that would mean that the total lien on the property per month would only be $1,000($6,000-$5,000 being paid in). Even if the applicant lived for 3 years in the nursing home there would only be a lien on the property in the amount of $36,000. This is a huge savings; at the end of the applicant’s life the children could simply take out a mortgage for the lien amount and the building would be saved. Who would not want a building worth over $600,000 for a cost of $36,000? Even if the rent was reduced by a $1,000 per month due to economic conditions that would simply meant that the lien would be $72,000 which is still a really good deal in order to keep the building. Plus the property would be protected, and that always offers more options to the family that would otherwise be the case.

The only downside to this technique is that there is a lien placed on each property and the state can recover for the benefits they have provided. If, on the other hand, advanced trust planning had been done previously, all of the property could have been completely protected while maintaining control over the property and preserving income and estate tax benefits.

Medicaid Asset and Income Rules for Married Couples and Spousal Impoverishment

Community Spouse May Keep:

  • Home (primary residence) subject to all of the concerns mentioned above
  • $117,240 in liquid assets such as bank and investments accounts, which amount is known as the community spousal resource allowance or CSRA.
  • $1,891.25 per month of income as a minimum, which is known as the minimum monthly maintenance needs allowance. Note: This amount is being increased to $1,938.75 per month effective July 1, 2014.

Institutionalized Spouse may keep:

  • All remaining assets must be spent down until there is only $2,000 left for the sick spouse before enabling the sick spouse to be approved for Medicaid eligibility. In other words, all assets over the $117,240 will be allocated to the sick spouse when determining Medicaid eligibility and must be spent down on nursing home care.

Application of these income and asset rules for married couples

1.   Law change effecting the calculation of the Community Spousal Resource Allowance CSRA effective July 1, 2006:

If a spouse is institutionalized, all of the couple’s assets initially are considered countable but, from the couple’s combined countable assets the healthy spouse is allowed to keep currently the first $117,240. This new rule and related calculation was effective July 1, 2006. It is important to note that this community spousal resource allowance is generally increased each November.

  1. Increasing the Community Spouse’s Asset Allowance:

The amount of the community spouse’s asset allowance is now determined by allocating assets to the community spouse until such spouse has currently no more than $117,240. This amount can be increased if the income of the community spouse is less than the minimum monthly maintenance needs allowance, currently $1,891.25 per month and only after the institutionalized spouse’s income has been shifted to the community spouse, (to be known as the income first rule). Such increase will not be more than the maximum monthly maintenance needs allowance currently $2,931 per month.

To obtain an increase in the community spouse’s asset allowance, after the institutionalized spouse has applied for MassHealth and has received a notice of denial, either spouse may appeal for “an adjustment” to the asset allowance. 130 CMR 520.017(A). The purpose of the adjustment was to hypothetically determine how many assets are needed to generate sufficient income as determined by the DMA so the community spouse can remain in the community. Certainly, living on $1,891.25/ month may not be easy to do especially if all the assets of the family have been taken except for the community spousal asset allowance of $117,240 mentioned above.

  1. Minimum Monthly Maintenance Needs Allowance:

The minimum monthly maintenance needs allowance is the amount needed by the community spouse to remain in the community. This amount is based on a calculation that includes the community spouse’s shelter and utility costs in addition to federal standards. The procedure is set forth in 130 CMR 520.017. If either spouse claims that the amount of income generated by the community spouse’s asset allowance, as mentioned above, is inadequate to raise the community spouse’s income to the minimum monthly maintenance needs allowance, the hearing officer must adjust the gross income available to the community spouse.

Under prior law, this amount was determined by reference to the community spouse’s income only. Under the new Regulations, the institutionalized spouse’s income must first be attributed to the community spouse’s income prior to any authorization to increase the community spouse’s asset allowance in order to determine the amount of the adjustment. In other words, the state will allocate the social security or pension of the sick spouse to the healthy spouse first to increase her income to this minimum amount needed before taking any of the assets. This is known as the income first rule which can be harmful to the healthy spouse since when the sick spouse dies the pension may end thus leaving her with few assets and little to no income to live on the rest of her life. In making any such adjustment, the hearing officer must include the amount of the income that will be generated by the spouse’s asset allowance if the asset allowance were invested in an account and generated income equal to the highest rate quoted in the bank rate monitor index as of the hearing date. (This amount is the 2 ½ year CD rate.) See generally, 130 CMR 520.017(A) et seq.

  1. Increase the Community Spouse’s Gross Income:

If the community spouse’s gross income is less than the minimum monthly maintenance needs allowance, then the fair hearing officer must allocate an amount of income from the institutionalized spouse (after the personal needs deduction of $72.80) that would increase the community spouse’s total income to equal, but not exceed, the minimum monthly maintenance needs allowance. If, but only if, after the fair hearing officer has increased the community spouse’s gross income as hereinbefore provided, the community spouse’s gross income is still less than the minimum monthly maintenance needs allowance, then the fair hearing officer will increase the community spouse’s asset allowance by the amount of additional assets that, if invested in a 2 ½ year CD, at the average rate quoted in the bank rate monitor index as of the hearing date, would generate sufficient income to raise the income total to the minimum monthly maintenance needs allowance.

Caution – Income First Rule May Bankrupt Healthy SpouseBeware of loss of sick spouse’s income and upon sick spouse’s death. The pension may be lost forever leaving survivor to struggle with little income. Depending on how long the sick spouse was in the nursing home prior to death there may also be very few assets left to generate the lost income needed for the healthy spouse to live on.

The Income First Rule and Spousal Impoverishment:

  • Example:  Husband has a pension of $2,000 per month while the wife gets $500 per month from social security. Husband checked the box on the pension that it ends when he dies. They own a home together worth $500,000 and have $300,000 of investment and bank account assets. They also have a $500,000 life insurance policy to make up for the lost income following the husband’s death.   Husband just entered the nursing home and no advanced planning has been done. Assume the nursing home costs $12,000 per month.
  • Impact of Income First Rule: The spouse will be given the home and the first $117,240 of assets and will get at least $1,891.25 per month income. Since she only has $500 coming in she will be given $1,391.25 (1,891.25-500) per month of the sick spouse’s income so as to get her up to the minimum income required by the state for the healthy spouse. The income gets allocated before the assets (income first rule). The balance of the assets $182,760 (300,000 – 117,240) will be allocated to the sick spouse and be spent on his care until there is only $2,000 left which is the amount the sick spouse is allowed to keep. This amount of assets should last about 15.2 months (182,760/12,000 per month). In addition, the state will force the liquidation of the insurance policy that was designed to replace the lost income following the sick spouse’s life. The result could be that upon the death of the sick spouse the healthy spouse could be left with the home, $117,240 in assets, and social security of $500 per month because, remember, the pension died with the husband. This really means that the surviving spouse will have to sell the home in order to make ends meet. In other words, the healthy spouse has been impoverished and may even need to file bankruptcy. Protect your spouse and do some advanced trust planning.

Planning Opportunities Last Minute:

(1)   Transfer the home to the community spouse and simultaneously have the community spouse sign a new Will disinheriting the husband. Remember, if this in not done and the healthy spouse dies, the home will transfer to the sick spouse and be at risk for the nursing home all over again. The transfer of the home to the community spouse is a permitted transfer under Regulation 130 CMR 520.019(D)(6).

(2)   Have the community spouse purchase an annuity with so-called “excess” resources as the income first rule generally prohibits the ability to appeal for an increase in the community spouse’s asset allowance. Since the combined total of countable assets of the institutionalized spouse and the community spouse exceeds the community spouse’s resource allowance of $117,240, the first $117,240 of assets can be used to make up the CSRA and can be transferred to the healthy spouse. The institutionalized spouse is permitted to retain $2,000 so that a total of $119,240 is protected. In this case, there would be $180,760 (300,000-117,240- 2,000) of excess resources, which, generally must be spent on nursing home care in the absence of further planning.

Planning Pointer: When determining the CSRA, it is important to think about which assets you would like to use to make up this amount. For example, if you have a life insurance policy on the sick spouse’s life with a death benefit of $500,000 and a cash surrender value of $50,000 then you should consider allocating this asset to the CSRA. By allocating this asset to the CSRA you have provided significant leverage to the amount of assets the healthy spouse maybe entitled to ultimately keep. In this regard, the current value is only $50,000 but the death benefit is $500,000 and this is a significant amount of assets to the healthy spouse who will likely need them to generate income to help him or her live the rest of their life.

Planning Note: The best thing to do in these last minute situations is to figure a way to protect the assets so they can be used to produce an income for the surviving spouse upon the death of the institutionalized spouse. In this regard, the $180,760 of excess resources can be transferred to the community spouse whereupon the community spouse could purchase an immediate annuity. Provided the annuity payments do not last longer than the life expectancy of the community spouse, and all other annuity requirements have been met, the purchase of the annuity would not be considered a disqualifying transfer, and the husband would be eligible for Medicaid immediately. (130 CMR 520.007(J)(1) and (2)). This technique would provide protection for at least the healthy spouse by preserving the assets for the healthy spouse. If the annuity period used is as short as possible, it may provide protection for the children as well. This short period would allow for the funds to be re-conveyed to the community spouse quickly and then planned for properly. It is also important that when having the healthy spouse purchase an annuity that it not be purchased until after the institutionalized spouse has been admitted to the nursing home and the amount of countable assets has been determined under Regulation 130 CMR 520.016(B)(1)(a), otherwise you may end up with less than the full community spousal resource allowance for the healthy spouse.

Finally, a private annuity can be used as well as a commercially sold annuity in order to protect assets like a home or other assets that do not lend themselves to the use of a private annuity.

Caution: There are numerous annuity rules that must be followed very closely in order to qualify these annuities as Medicaid protection annuities. A full explanation of these Medicaid rules are beyond the scope of this article. Please seek an elder law attorney’s advice prior to purchasing one of these annuities. To learn more about Medicaid annuities you can contact Todd E. Lutsky Esq. LLM with the law firm of Cushing and Dolan at 617-523-1555.

Annuities for single people: A single person can purchase an annuity with the assets that exceed their limit of $2,000. This purchase will essentially convert the excess assets to an income stream which will pay out to the individual and ultimately to the nursing home. The difference is that this person will be eligible for Medicaid and the payment rate is generally half as much as the private pay rate which can translate into savings of around $6,000 per month assuming the private pay rate is $12,000 per month and the Medicaid rate is $6,000 per month. A full discussion as to how this works is beyond the scope of this article and again, legal guidance is needed prior to the purchase of this type of an annuity.

Advanced Medicaid Planning for Nursing Home Care – Really There is no Substitute

Penalty Periods Associated with Transferring Assets for less than Fair Market Value

  • The Penalty Period: This is simply a period of time in which a person will not be eligible for Medicaid benefits following the transfer of assets for less than fair market value. The formula to compute this penalty period is the amount transferred divided by the average monthly cost of a nursing home determined by the state (currently $9,000 in Massachusetts). Note: this nursing home cost is not generally the actual amounts that nursing homes charge in your state. That amount is much more. Note: currently in Massachusetts the actual cost of a nursing home is around 12-14,000 dollars per month.
  • Example: The transfer of a $400,000 home to an irrevocable trust results in a penalty period of approximately 44.4 (400k\9,000) months.
  • The problem is that under the Deficit Reduction Act of 2005 this penalty period will not begin to run on the date of transfer. This means that the assets are still not protected from the nursing home 44 months after the transfer.
  • The Begin Date: This period will not begin to run until one enters the nursing home, applies for Medicaid and gets a denial (necessary to start the penalty clock). Therefore, this 44 month penalty period begins to run only at the time when a person applying for Medicaid has less than $2,000 of other assets. In other words, if the person applying has made this transfer but still has, say $50,000 in the bank at the time of application, the state will deny Medicaid benefits until that $50,000 is spent down and only then will the 42 month penalty period mentioned above begin to run.
  • Planning opportunities however still exist under the five year look back rules.

Look Back Periods Created when Assets are transferred for less than Fair Market Value

  • A look back period means that the state is permitted to look at all of your financial activities and transfers over a five year period. This period begins on the date you enter a nursing home and apply for Medicaid benefits.
  • The purpose is to determine if you have made any transfers of assets, either outright to family members or into a Medicaid irrevocable trust, for less than fair market value, and, if so, you will be denied Medicaid benefits. This would be the time in which the previously discussed penalty period would begin to run.
  • Caution: Please be aware that this look back period applies regardless of whether the gifts are made directly to family members or placed into a Medicaid irrevocable trust.

Advanced Planning Opportunity

  • Start Date of Look Back Period: This five year look back period begins to run on the date in which assets are transferred either to the irrevocable trust or outright to family members for less than fair market value even if you have not entered the nursing home.
  • Example:   Establish a Medicaid irrevocable trust and transfer your home and some assets to it, and at the end of five years those transferred assets will be protected from the costs of long term care. This is why advanced planning still works. If you get the clock started, you will always be better off than if you never started the clock running.
  • Planning Pointer: {Is the look back period prorated}? This is not prorated the way we would normally think but still very powerful.   People often times think it is too late to begin planning but that is just simply not true. Regardless of your age you will always be better off having started the look back period running than you would be if you never started it, so please, do not wait any longer to plan.
  • For example: You transfer your $500,000 home to the trust along with $200,000 of investments while you kept outside the trust your $200,000 IRA today. You get sick in three instead of five years. What happens? The rule is that the assets in the trust are still not protected for another two years. However, there is $200,000 still outside the trust in your IRA that could not have been transferred to the trust anyway due to income tax consequences. As a result, I would suggest to the family that these assets be spent on the nursing home for the next two years in order to save all the assets in the trust worth approximately $700,000. Wow what a win! Spend 200,000 to save 700,000.

Planning Solutions after the Deficit Reduction Act of 2005 and the Doherty Decision

  • Life Estates: This is when a person transfers the remainder interest in their home either to family members or to an irrevocable trust and retains the right to live there for the rest of their life. This will protect the home from the nursing home five years after the date of transfer, but if given to the kids will result in a loss of control, difficulty in selling it later, greater exposure to children’s creditors, inability to change beneficiaries later and adverse income and gift tax consequences. A complete discussion of life estates is beyond the scope of this article but please seek legal advice prior to establishing a life estate.
  • Planning Pointer: [to use or not to use life estates anymore] While transferring the remainder interest to an irrevocable Medicaid trust will avoid the problems mentioned above, the use of life estates are generally limited to people who may need a reverse mortgage in the future. Short of that Life Estates are not the most favored form of asset protection since the implementation of the Deficit Reduction Act of 2005.
  • Outright Gifts to Family: This will protect the transferred assets from nursing home costs five years after the date of transfer, but this generally results in a significant loss of control by the parents, greater exposure to children’s creditors and divorces along with adverse income and gift tax consequences including the loss of the step up in basis. This means the kids could have a large capital gains tax due upon sale of the home or any highly appreciated asset following the death of the parent.
  • Modified Irrevocable Income Only Trusts: These trusts remain the best form of advanced nursing home planning available. These trusts allow the parent to:
  • Retain control over the trust assets by either being the trustee or retaining the right to remove the trustee at any time for any reason, which, for example, will enable you to sell your home and replace it without the children’s permission and without resetting the five year look back period.
  • Manage any and all other trust investments and collect all trust income.
  • Retain tax benefits such as maintaining the $250,000, or if married, the $500,000 capital gains tax exclusions on the sale of your primary residence. In addition, you will continue to pay income taxes at the same rates as you did prior to establishing the trust, provided the trust is a grantor trust.
  • Retain the ability to change the beneficiaries of the trust later in life as life, events tend to change over time. For example, if later in life you wanted to leave more assets to the grandkids you would be able to make that change to the trust without needing anyone’s permission and without resetting the five year look back period.
  • Estate and Asset Protection Planning at the Same Time: Finally, with the federal estate tax exemption increased to $5,340,000 and the Massachusetts exemption amount, remaining at $1,000,000, more and more married couples want to do both estate and asset protection planning at the same time. These irrevocable Medicaid trusts can do that by utilizing both exemption amounts at your death. If you are married and your estate is $2,000,000 or less, you can create two of these trusts and split the assets between them. Then upon your demise, the trust assets will avoid probate and will get to your family federal and Massachusetts estate tax freeWhile you may not be as concerned about the federal estate tax, why should you pay any Massachusetts estate tax or federal estate tax in the event they change the laws in the future?
  • For Example, if you have an estate worth $1,500,000 and the only estate planning document you have in place is a will, then upon the death of the surviving spouse there would be an estate tax liability of approximately $64,200 to Massachusetts. There would be no federal estate tax liability because the estate is under the current exemption amount of $5,340,000.   If instead these irrevocable trusts were implemented and the estate did not grow above the $2,000,000 level, there would be not tax due federal or Massachusetts.   In addition, five years after these trusts are funded with your assets, they will also be protected from the nursing home and will avoid Medicaid estate recovery provisions and the costs associated with the probate process upon your demise. All this can be accomplished with little or no loss of control over the trust assets, and as explained above, with no adverse income tax consequences during your life. A complete discussion of these irrevocable income only trusts are beyond the scope of this article, but to learn more about them you can contact Todd E. Lutsky Esq. LL.M with the law firm of Cushing and Dolan at 617-523-1555.
  • Do nothing: This is always an option but could likely result in the loss of all your assets to nursing home costs, payment of unnecessary probate fees, and federal and state estate taxes. All of these consequences can be avoided with the implementation of some or all of the planning techniques discussed in this article.


  • Thoughtfully preparing legal documents that you will need allows you the opportunity for your wishes to be carried out.
  • Proper estate planning can limit expenses and provide your heirs with funds according to your wishes.
  • Properly established and funded Irrevocable trusts enhance privacy, provide your heirs with funds according to your wishes, protect assets from the nursing home, reduce estate taxes and avoid probate.
  • The next step is to take action.

Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors. Armstrong Advisory Group, Cushing & Dolan and The Securities America Companies are unaffiliated.  Representatives of Securities America Inc. do not provide legal or tax advice.  The scenarios provided are for illustrative purposes only and not intended to represent client experiences of Armstrong Advisory Group or the Securities America companies.  Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state

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