Top 7 Misconceptions about Long-term Care & Medicaid

There are 109 Medicaid programs (at last count) in Texas – each with their own rules. This article concerns the errors or misconceptions common in one of those programs – long-term care Medicaid (where the government helps pay for care in a nursing home). Seven errors or misconceptions in connection with long-term care Medicaid are as follows:

  1. The government will take my home and I need to sell my home.  

The equity limit in 2021 in Texas for a homestead to be a non-countable resource is $603,000 if the applicant is single and indicates that they have an intent to return home (even if that is not realistic).  There is no equity limit for a homestead if the applicant is married. However, the state does have a right to make a claim (not a lien like in other states) against the homestead after the Medicaid recipient’s death to the extent that Medicaid benefits have been advanced. There are several exceptions to a successful claim by the state (survived by a spouse, disabled child, etc.)  in addition to certain waivers due to an undue hardship on the heirs. Certain irrevocable trusts, Ladybird (enhanced life estate) deeds, and transfer on death deeds are commonly used to avoid a successful claim by the state against the homestead of the recipient.         

2. Applying too soon for Medicaid.  

Many make the mistake of applying for Medicaid too early. For example, if an applicant applies prior to being admitted to a nursing home, there should be a denial and the applicant would have to refer to the original application which would likely result in a delay in approval. There are several non-financial eligibility requirements (i.e., being in a facility that accepts Medicaid, being in a Medicaid bed, medical necessity, etc.). You must meet all requirements (financial and non-financial) prior to achieving eligibility. 

3. Applying for Medicaid too late.

Although it depends on the factual situation, an application that is not promptly filed could result in the loss of thousands of dollars. For example, if the applicant has made an uncompensated transfer in the last 5 years prior to the Medicaid application submission and was otherwise eligible for Medicaid, the transfer penalty would not begin until the first day of the month of the application.

4. Assuming there can be no emergency Medicaid planning.    

   Many think you can’t plan for the Medicaid applicant once institutionalized and you should simply spend down countable resources until the eligibility limit is reached. Even after institutionalization, an applicant can change countable resources to being non-countable resources in addition to taking advantage of various other rules. 

5. Failure to take advantage of rules created by Congress or under state law.  

Although many Medicaid programs have a 5 year look-back period penalizing uncompensated transfers made within 5 years prior to the application, there are certain transfers that are not penalized (i.e., to a (a) spouse; (b) disabled child; (c) trust solely for the benefit of someone if disabled if the trust is actuarially sound; (d) special needs trust if the grantor is under 65; (e) pooled trust if the grantor is under age 65; (f) irrevocable 529 college education plan for a grandchild; and (g) establishing an UTMA account for anyone under 21, etc.).

6. Making transfers without retention of control.

Some make the mistake of giving away most or all of their assets too early since Medicaid is “means-tested” (as indicated above, the government penalizes uncompensated transfers if made within 5 years of application unless the transfer falls within an exception to the rules). However, the potential applicant should normally retain enough funds for their own care even if they attempt to reduce assets to achieve Medicaid eligibility for governmental assistance in payment for the cost of care and medications. Outright gifts could result in various tax issues (i.e., capital gains tax, gift tax, loss of step up in basis, property tax, etc.). Additionally, the donee could have future creditor issues, marital problems, die first, become disabled, become estranged, etc. which could risk the funds given by the donor. Certain properly drafted irrevocable trusts can also be used to protect assets from these issues and achieve the desired results.

7. Failure to use spousal protection rules.         

If one spouse is applying for long-term care Medicaid and other spouse lives in the community (i.e., not the nursing home commonly known as the community spouse) and their combined non-countable resource income is low enough, then the community spouse can sometimes be able to have hundreds of thousands of dollars while still achieving Medicaid eligibility for the institutionalized spouse. Years ago, it was common for the community spouse to file for divorce since they needed money to live on for the rest of their life and Medicaid is means-tested counting the resources of the couple even if they had a prenuptial or postnuptial agreement. Congress determined that was not in the best interest of society. So, it permitted expansion of the normal allowable limit if the couple’s income was low enough.  

Of course, if one has enough resources, long-term care insurance, income or a hybrid policy that would adequately pay for the cost of care, long-term care Medicaid becomes less of an issue or not an issue at all. However, that is not the case for most Texans.