Compliments of Our Law Firm,
Written By: The American Academy of Estate Planning Attorneys
As the average life expectancy in America continues to increase, we can all anticipate living much longer than even our grandparents did. Living longer, however, also increases the odds that long-term care (LTC) will be needed at some point in your life. The cost of that care could threaten your retirement nest egg, as well as the family assets you hoped to pass down to future generations. Medi-Cal can help with your LTC expenses. However, if you did not plan ahead, qualifying for Medi-Cal could deplete your assets, as well. The good news is a special trust can help you qualify for Medi-Cal without jeopardizing your financial future.
Medi-Cal Eligibility and the Spend-Down Rules
At an average cost of over $80,000 a year nationwide, the average person cannot afford to spend much time in long-term care (LTC) without putting a serious dent in their financial position. Consequently, over half of all seniors in LTC turn to Medi-Cal for help. Medi-Cal can help cover LTC expenses, however, since Medi-Cal is a “needs-based” federal program, an applicant must first demonstrate a need for benefits to qualify for assistance. Both your income and your “countable resources” will be considered when you apply for Medi-Cal. Countable resources include bank accounts, brokerage accounts, and all other assets that are not exempt, such as your primary residence (up to an equity limit).
If your countable resources exceed the paltry limit ($2,000 total for an individual applicant in most states), Medi-Cal will deny your application. In order to meet the Medi-Cal eligibility guidelines, then you would need to engage in what is referred to as Medi-Cal “spend-down.” In practical terms, this means you would need to reduce your countable resources until the value of those resources is below the Medi-Cal limit. Only after your assets had dwindled down to below the resources limit would Medi-Cal consider approving your application.
Can an Irrevocable Income Only Trust Help?
Fortunately, there is a way to protect the family wealth and still qualify for Medi-Cal through the creation of an Irrevocable Income Only Trust. Keep in mind the goal is to reduce the value of your “countable resources” so you, or your spouse, can qualify for Medi-Cal. An Irrevocable Income Only Trust accomplishes that goal by transferring your “excess” assets into the trust and providing you with income only from the trust. Because the trust is an Irrevocable Trust, assets you transfer into the trust are no longer legally considered to be yours. As such, they will not be counted when determining the value of your “countable resources.” Eventually, the trust assets will pass to heirs after the death of the surviving spouse.
In the meantime, you would receive income from the trust. When in LTC expenses in excess of your allowable income would be covered by Medi-Cal. If your trust income is excessive, your estate planning attorney may be able to utilize additional Medi-Cal planning tools to reduce the amount of countable income you have when you apply for Medi-Cal benefits.
Don’t Forget About the Five-Year “Look-Back” Period
Knowing that an Irrevocable Income Only Trust can protect and preserve your wealth for future generations should be great news; however, don’t forget about the Medi-Cal five-year “look-back” rule as it is essentially the last piece of the Medi-Cal planning puzzle.
The five-year look-back rule prevents you from transferring assets at the last minute in anticipation of the need to qualify for Medi-Cal benefits. When you apply, Medi-Cal will review your finances for the five-year period, preceding your application, looking for asset transfers made for less than fair market value. If any are found, Medi-Cal will impose a penalty period during which time you will not be eligible for benefits. The length of the penalty period is determined by taking the fair market value (at the time of transfer) of the transferred asset(s) and dividing that figure by the average monthly cost of private pay LTC in your area. The penalty period only begins running when you are otherwise eligible. In other words, you must have the medical and financial need.
Because of the five-year look-back rule, creating an Irrevocable Income Only Trust at the last minute won’t work. Instead, you need to include Medi-Cal planning tools and strategies in your estate plan long before the need to qualify for benefits actually arises.