Protecting Real Estate Assets from Creditors and Lawsuits
How to Protect Estate Assets of Someone on Medical Assistance
Medicaid – called medical assistance in many states – provides a safety net for elderly or disabled Americans who require long-term care in a medical facility such as a nursing home. To qualify for medical assistance, people can only have a limited amount of assets and income. This means preserving assets to pass down to children or grandchildren can be difficult if not impossible. Many attorneys who specialize in elder law assist with Medicaid planning, using legal methods to protect the estate assets of someone on medical assistance.
Creating a Trust
Choose the type of trust.To protect the estate assets of someone on medical assistance using a trust, the trust created generally must be irrevocable. Creating a revocable trust would mean the person still had control over the assets in the trust.
- With an irrevocable trust, however, the person no longer owns the assets. Rather, the assets belong to the trust.
- Since the assets in the trust don't belong to the person on medical assistance, they can't be seized by the government to recoup the costs of the person's medical care after their death.
- Rather, the assets are held by the trust for the benefit of the heirs named by the person who creates the trust.
- If the person on medical assistance is married, they may want to create a joint trust rather than an individual trust. A joint trust includes all marital assets.
Decide on trustees.The trust must name a trustee. Typically it's best if the person on medical assistance is not the trustee. Otherwise, the state may determine they still maintain control over the assets in the trust.
- Similarly, the person's spouse shouldn't be the trustee. When looking at assets of a married person, the assets in control of both spouses are considered for the purposes of qualifying for medical assistance.
- To ensure the trust is properly managed, many people name an attorney or financial advisor as trustee.
- Also name a successor trustee. This person will take over in case the trustee becomes unavailable. It may be another attorney or financial advisor, or another family member.
Calculate the look-back period.When someone applies for medical assistance, the state looks back at their income and assets for the five years before the application was filed. Any transfers made to protect estate assets can result in penalties.
- State and federal law requires people on medical assistance to spend down any assets they have that exceed the legal limit before they can qualify for the government service.
- If someone on medical assistance transfers all or most of their assets to a trust during this period, the state presumes this was done to exclude those assets for the purposes of qualification.
- As a result, the state will deem the person ineligible for a period of time, based on the value of the assets that were transferred.
- The period of time is measured based on the cost of medical assistance for nursing home care each month.
- For example, if that cost is ,000 and the person transferred assets worth ,000 to a trust, that person would be ineligible for medical assistance for nine months.
- To avoid this penalty, the trust must be created more than five years before the person applies for medical assistance. However, even if the penalty applies, the assets still are not subject to liens or seizure by the state to cover the costs of the person's medical assistance.
Draft the trust documents.It can be relatively simple to find forms or templates online that you can use to create a simple trust. However, if the goal is to protect the estate assets of someone on medical assistance, you may want to consult an attorney.
- The trust begins by naming the trust and identifying the trustees and successor trustees.
- The property in the trust is listed, along with the names of the beneficiaries of the trust. Typically beneficiaries are children or grandchildren of the person on medical assistance, but they may include others as well.
- If the person on medical assistance (or who will potentially be on medical assistance in the near future) already has a will, that document can serve as a guide to designating the beneficiaries of the trust.
- Keep in mind that if the person already has estate planning documents, they will need to be updated to reflect the trust that has been created. You may want to consult an estate planning attorney to help.
Execute the trust documents.The finalized trust documents must be signed by the person on medical assistance before the trust goes into effect. Typically the signatures must be notarized. Some states may require additional witnesses.
- Some states also require more than one original signed copy. Check your state law or contact an estate planning attorney to find out.
- Make copies of the signed, notarized documents. Each trustee or successor trustee should have one, as well as the person who created the trust and their spouse.
- You also may want to make copies for beneficiaries, particularly those who will be receiving real property.
Transfer assets into the trust.After the trust has been executed, all assets listed can be transferred into the name of the trust. This may require opening bank accounts in the name of the trust, or executing other transfer documents such as deeds.
- Before you set up bank accounts or transfer real property to the trust, you'll need to get an employer identification number (EIN) for the trust from the IRS.
- Despite the name, an EIN isn't just for employers. You also must get one for a trust that will hold assets, particularly income-generating assets. You'll also need an EIN to open up bank accounts in the name of the trust.
- Once you have an EIN for the trust, you transfer assets into the name of the trust just as you'd transfer assets to any other individual or business entity.
Paying Off Debts
Gather information about the person's debts.Using someone's assets to pay off debts may not directly protect estate assets from the government. However, since debts would be paid out of the estate, fewer debts mean more estate assets.
- For example, assets can be used to pay off credit cards or personal loans. Since available credit is not considered an asset, these payments do not affect the person's eligibility for medical assistance.
- Paying off existing debts and obligations also doesn't qualify as a transfer that could result in a penalty if done within five years before the person applies for medical assistance.
- In addition to paying debts, it's also possible to use assets to purchase exempt items. For example, the person could buy a new HVAC unit or new roof for their primary residence.
Identify exempt assets.Certain assets, such as a personal residence, a car, and other personal items such as furniture and clothing, are exempt from seizure by the government to recoup medical assistance.
- The homestead exemption covers the primary residence of the person on medical assistance if their spouse still lives in the home, or if the person is reasonably expected to return home after long-term stay in a nursing home.
- For example, the homestead exemption would apply to the primary residence of an unmarried individual who was staying in a nursing home for several months to recover after hip surgery, but was expected to return home.
- Keep in mind that people are expected to use the equity in their home to cover their long-term care expenses. The government will put a lien on the property if it is owned by the person on medical assistance.
- For this reason, transferring the home to a trust may protect it for future generations.
- Another way to protect the home is to transfer the deed to the person who would get it under a will or other estate plan, and then grant the person on medical assistance a life estate in the property.
- However, the government can reach life estate properties as well in some circumstances. Contact an attorney if you're thinking about using this option to protect the estate assets of someone on medical assistance.
Make advance payments.If the person on medical assistance has regular bills that are due each month, you may be able to make advance payments on those bills using the person's liquid assets.
- Keep in mind that this doesn't preserve assets for the estate in a direct sense. However, advance payments for regular bills decrease that person's expenses while they remain in a nursing home.
- Fewer expenses means more assets for the person's estate. It also means the person's spouse, children, or grandchildren aren't forced to pay these expenses on their behalf while they're in a nursing home.
- Property taxes are a good regular expense on which you can make advance payments.
- One benefit of making advance payments is that this sort of transfer can be made at any time. Even if made during the look-back period (in other words, less than five years before the person starts medical assistance), these payments are considered totally valid and won't affect the person's eligibility for medical assistance.
Document payments to family members.A person on medical assistance can pay a family member for services. However, those services must be provided under a written contract. The family member's payment cannot exceed the usual payment for similar services.
- These payments can be used to transfer assets to a family member that would have been passed on using a will, trust, or other estate planning document.
- For example, suppose Sally wants to leave her son ,000. She has to spend down her assets before entering the nursing home so she will qualify for medical assistance.
- Sally drafts a contract with her son under which she pays him ,000 a month to serve as caretaker and landscaper at her home while she is in the nursing home.
- Provided the payment Sally has agreed to make are similar to what other full-time caretakers and landscapers would earn, this payment would not be considered an unlawful transfer that would affect Sally's eligibility for medical assistance.
Converting Assets to Income
Consult an attorney.Medical assistance regulations are complex, and change frequently. Before attempting to convert assets, speak with an attorney who has experience in elder law and estate planning.
- Look for an attorney who specializes in elder law and has significant experience with Medicaid planning.
- The law in this area changes rapidly, but an experienced attorney will be up-to-date on the most recent changes and how they affect planning strategies.
- Provide the attorney with detailed information about the income and assets of the person on medical assistance whose estate assets you would like to protect.
- Try to talk to more than one attorney so you can potentially explore a variety of different strategies to find the one that best meets your goals.
Buy life insurance policies that are exempted.State laws on qualifying for medical assistance exempt life insurance policies below a specific amount. Burial plans also may be exempted, provided the maximum benefit is less than ,000.
- When evaluating a life insurance policy, it's generally better to get your advice from an attorney than from an insurance agent.
- Keep in mind that any insurance agent with whom you speak about life insurance is trying to sell you a policy. While they may tell you the truth, they also may skew the truth to favor their policy.
- They also may not be as up to date on changes in Medicaid law, or the application of the law in your particular state. Something that was true last year, or in another state, may not be true for you.
Purchase an annuity.An annuity is a contractual agreement. The person on medical assistance makes a large, lump-sum payment to a financial institution in exchange for a promise to make a series of monthly payments later on.
- An experienced elder law attorney can help you choose an annuity that meets the specific requirements of medical assistance regulations.
- If the purpose of the annuity is to benefit the spouse of the person on medical assistance, the structured payments all must be made within the spouse's lifetime for the plan to qualify.
- Purchasing an annuity may result in a significant drop in immediately available savings. However, particularly if the person is expected to return home and resume caring for themselves after several months, it can help that person retain those assets and provide more security for the future.
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