When a spouse faces the need for nursing home care, the couple should consider retitling assets to prepare for Medicaid eligibility. This article explores how and why assets should be retitled.
Why Retitle Assets
Since Medicaid is a needs-based program, there are limits on the value of assets that a Medicaid applicant and his or her spouse may own. A Medicaid applicant is normally allowed to keep only between $1,500 and $2,000 held in the applicant’s name, after qualifying for Medicaid. There is a much higher limit on what the healthy spouse, known as the "community spouse," can keep to pay for future living expenses.
The primary reason to retitle assets is to keep the Medicaid applicant's assets under the limit established by federal and state law. While it is true that assets in either spouse’s name are considered in making the initial Medicaid eligibility determination, once the applicant qualifies for Medicaid, the spouses' assets are treated separately, based upon whose name the ownership is under.
After applying for Medicaid, the Medicaid applicant can transfer certain assets to his or her spouse without penalty. Transferring assets sooner than later can avoid future problems.
Problems Due to Incapacity
Quite often, the Medicaid applicant is suffering from a disability that at some point renders the applicant incapable of transferring title to property. When an applicant is incapacitated, transfers may be made only by someone authorized to make a transfer on behalf of the applicant, such as an agent under a power of attorney or a court-appointed guardian or conservator. There are possible problems with both of these scenarios. Written powers of attorney may not allow for a transfer to the community spouse, especially when the community spouse is the agent. Guardianships and conservatorships are expensive and time-consuming and best avoided when possible.
If the applicant is not yet incapacitated, transferring assets to the name of the community spouse will, in turn, enable the community spouse to make future transfers that may be desired or required for Medicaid eligibility.
How we'll discuss when it makes sense to retitle assets in the name of the community spouse.
Married couples traditionally own their homes jointly, unless they choose to keep their property separate (when one spouse inherited the property or where the home was already in the name of one spouse prior to the marriage). When a couple owns the home in both names, it is wise to consider transferring the title to be in the sole name of the community spouse. Although the home isn't usually a countable asset for Medicaid, there are a few reasons to transfer it to the community spouse's name after qualifying for Medicaid.
First, if the Medicaid applicant/recipient becomes incapacitated, the future transfer or sale of the house may be difficult.
Second, when the property is owned jointly with rights to survivorship, as many couples' houses are, if the community spouse dies before the Medicaid recipient, the house will become a countable asset of the Medicaid recipient. The Medicaid recipient may then have to sell the house to maintain eligibility if the Medicaid recipient will continue to reside in a nursing home. But then, when the home does sell, the proceeds will belong to the Medicaid recipient and will disqualify the recipient from further Medicaid eligibility.
If the home is owned jointly without any survivorship rights, and if the community spouse ceases to reside there, it will have to be placed on the market for sale.
Third, if the home is transferred to the name of the community spouse, Medicaid will not be able to place a lien on the property to recover for payments made on behalf of the Medicaid recipient. Similarly, transferring title of the home to the community spouse will avoid any possible "estate recovery," since the home will no longer be part of the Medicaid recipient’s estate.
The Applicant's Retirement Accounts
Some assets present specific problems for Medicaid eligibility, and retirement assets are among the most problematic. Many states consider the value of retirement accounts as countable in making the Medicaid eligibility determination. And since retirement accounts can be owned only by an individual, retirement accounts in the name of the Medicaid applicant will ordinarily disqualify the applicant from Medicaid eligibility. (State laws differ with regard to the treatment of retirement accounts, so it is crucial that you consult an elder law attorney to determine the law of your state.)
Federal law does not allow ownership of a retirement account to be transferred to a spouse. So when a Medicaid applicant owns a retirement account, liquidation of the retirement account (spending the money in it) is normally the only solution. Unfortunately, when you take money out of traditional retirement accounts, because the retirement account consists of tax-deferred contributions, taxes will usually be owed.
One option that lessens the tax burden is to "annuitize" the retirement account, converting it to a stream of income payable to the owner, based upon the owner's life expectancy. This, however, is rarely a good option, considering that income payable to the Medicaid applicant will be applied toward the applicant’s nursing home expenses, referred to as “share of cost.” And under federal law, the income must be made payable to the owner of the retirement account, so designating the community spouse as the payee is not an option.
The Community Spouse's Retirement Accounts
The Medicaid applicant should consider asking the community spouse to change the beneficiary designations on his or her retirement accounts. (In most cases, the community spouse will have designated the Medicaid applicant as primary beneficiary upon the death of the community spouse.) This is not a smart outcome for a Medicaid recipient, since the recipient will then become "over-resource" and disqualified from Medicaid. To avoid this result, the community spouse should change the beneficiary to someone other than the recipient.
When the retirement account is owned by the community spouse, and the couple is over-resource, the community spouse may consider annuitizing the retirement account, which will eliminate the retirement account as a countable resource and turn it into a stream of exempt income to the community spouse.
Unlike retirement accounts, life insurance does not consist of any tax-deferred contributions, so liquidation of a life policy is a reasonable way to obtain the cash value, which can be transferred to the community spouse. Unfortunately, liquidating a life insurance policy results in a loss of the death benefit, which can be substantial.
Another approach is to simply transfer ownership of a life policy to the community spouse. This transfer does not disqualify the Medicaid applicant, since transfers to a community spouse are allowed. This way, the death benefit remains intact. Of course, the community spouse will have to maintain future premium payments to keep the policy in effect.
Learn more about legitimate methods of planning for Medicaid eligibility.