Fitting Medicaid Issues and Long-Term Care Insurance into Estate and Gift Tax Planning

by: Brian E. Barreira, Esq.

Proper estate planning should not ignore long-term care issues, such as the following:

(1)  Any gifts or other transfers for less than full value, including $13,000.00 gifts and other annual exclusion gifts, are considered to be disqualifying transfers for Medicaid purposes.

(2)  The average current cost of a semi-private room in a Massachusetts nursing home is now roughly $300-320 per day, which amounts to $9,000-9,600.00 per month or $108,000-115,000 per year. Persons with Alzheimer’s disease who can no longer remain at home run the risk of an extended nursing home stay, reputedly averaging 8-9 years. With a potential long-term care cost of roughly $864,000-1,035,000, how can intelligent estate and gift tax planning be done without factoring long-term care insurance into the process? It is difficult for an estate planner to recommend making large gifts if the remaining assets will possibly be insufficient to meet the client’s foreseeable needs.

(3)  Often overlooked in the estate and gift tax planning process is how a revocable trust established by a now-deceased spouse is viewed if the surviving spouse applies for Medicaid. A funded trust that avoided probate is often considered completely available for the surviving spouse’s care, so funding a revocable trust for the sole purpose of avoiding probate can place a surviving spouse in a worse position than if probate avoidance had not been accomplished.

(4)  There is one type of trust that spouses can establish for each other that meets the criteria established under both federal law and Massachusetts regulations for being considered unavailable to a Medicaid applicant: a discretionary testamentary trust. Under a peculiar federal Medicaid law, an unfunded trust that was funded by the deceased spouse’s Last Will and Testament is not considered available for payment of the nursing home care of the surviving spouse to the extent that distributions are discretionary. In essence, a bypass or credit shelter trust can be established under the decedent’s Last Will and Testament that has only the surviving spouse as a beneficiary, with no required distributions of income or principal. The surviving spouse should not be given a general power of appointment over the trust or any other power to make withdrawals.

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