Protect Accumulated Assets and Inheritances From the Costs of Long-Term Care

For the typical married clients, the costs of long-term care (LTC) can easily destroy any economic protection from accumulated assets of the couple on the admission of an ill spouse into an LTC facility, leaving the well spouse destitute. Likewise, inherited funds from a deceased spouse can quickly disappear if the survivor needs LTC.

Here’s four examples of what LTC can cost annually in 2016 for a semi-private room:¹ Arizona, $75,555; Colorado, $83,220; Florida, $89,060; and Washington, $96,725.

With these increasing costs, it’s essential to protect the assets of your clients. Asset protection techniques can minimize the damage for well-advised clients. Here are two workable solutions to protect the accumulated assets or inheritances from the costs of LTC before Medicaid benefits become available. One is the use of Medicaid qualified annuities (MQAs) to protect accumulated assets and the other is using a will to protect inheritances. But, be sure to check your jurisdiction’s laws for any variances.

MQAs

MQAs could be an alternative for spouses who have accumulated assets and don’t qualify for LTC under Medicaid. To qualify for LTC under Medicaid, a couple may have no more than $2,000 in “countable assets.” (See “Non-Countable Assets,” p. 51, for assets that won’t be counted when calculating the $2,000 limit.) The MQA enables an ill spouse to convert an amount (there appears to be no limit) of liquid investments into an income stream for the well spouse. Accordingly, that amount disappears as an asset, and the ill spouse is eligible for LTC. (See p. 51 for an example of this strategy.)

Transmittal No. 64

In 1994, the government issued Transmittal No. 64, which provides the terms for, among other things, using MQAs to enable funds to be converted into an MQA income source to remove that amount from being considered a resource, making an ill spouse eligible for Medicaid.² Transmittal No. 64’s annuity provision was recodified in the Deficit Reduction Act (DRA) of 2005.³ DRA Section 6012 and other federal statutes provide a series of specific rules that the MQA must follow:

1. When determining eligibility or recertification, the applicant must disclose any annuities held by either spouse.⁴

2. On disclosure, the state shall notify the annuity issuer that the state is a remainder beneficiary for any benefits provided to the applicant.⁵

3. The state shall be named as a remainder beneficiary for the amount of benefits provided to the applicant.⁶

4. The state is named as the remainder beneficiary after the community spouse, or minor or disabled child, except that the state shall be named first remainder if a protected individual disposes of the annuity.

5. The annuity is payable monthly (in equal amounts) and may have no balloon or deferral mechanism.⁷

6. The annuity is irrevocable and nonassignable.⁸

7. The annuity is actuarially sound.⁹

The government was concerned about spouses using annuities to avoid a spend down of the couple’s assets, rather than as an income source. As stated in Transmittal No. 64:¹⁰

Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purpose of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary, the annuity can be deemed actuarially sound. (Emphasis added.)

The tables reflecting the estimated remaining life span for men and women are set forth in Transmittal No. 64. 

Example: Assume that Harry and Wanda, a married couple, have $300,000 in cash assets and Wanda needs LTC. Harry has just turned 70. If the couple lived in Florida, the $89,060 annual cost of care would exhaust the $300,000 in a little over three years.

Harry seeks advice from an attorney specializing in elder law and asks if there’s anything that can be done to preserve the couple’s $300,000 from being required to be spent on medical care.  

The attorney explains that an MQA would enable Harry to use the $300,000 for his support and enable Wanda to be eligible for Medicaid LTC benefits. Essentially, the $300,000 disappears for Medicaid LTC eligibility. 

Applying the Transmittal No. 64 table for men, at age 70, Harry has a remaining life expectancy of 11.92 years. As such, his annuity may be no longer than 11.92 years to be considered “actuarially sound.”

Again, be sure to check your jurisdiction’s laws and practices, but an MQA can certainly provide benefits for those with the right fact situation.

Unfortunately, an individual retirement account or other retirement plan may not qualify as an MQA because an annuity consists of property transferred to a qualified insurance company in return for a series of payments. With a retirement account, the transfer would accelerate the income. However, see the following section on trusts created by will.

Using a Will to Protect Inheritances

A common asset protection planning technique is for a deceased spouse to pass property at death to an irrevocable trust for the surviving spouse’s benefit, which contains a spendthrift provision providing that the spouse beneficiary’s interest may not be assigned, transferred or available to a creditor of the beneficiary. Such design protects the spouse beneficiary’s inheritance from creditors, prior to actual receipt by the spouse.¹¹

Unfortunately, a spendthrift clause doesn’t provide asset protection when it comes to eligibility for Medicaid LTC.¹² The relevant Medicaid statute provides that, if one spouse creates a trust for the other spouse, unless he creates the trust by will, the trust is considered to have been created by the spouse beneficiary, in effect, a self-settled trust.

Federal law under 42 U.S.C. Section 1396p(d) provides: 

(d) Treatment of trust amounts 

(1) For purposes of determining an individual’s eligibility for, or amount of, benefits under a State plan under this subchapter, subject to paragraph (4), the rules specified in paragraph (3) shall apply to a trust established by such individual. 

(2) 

(A) For purposes of this subsection, an individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will: 

(i) The individual. 

(ii) The individual’s spouse.¹³ (Emphasis added.)

With typical A/B trust planning, the decedent’s property that isn’t needed for a marital deduction passes to the family trust. Because a will didn’t create the family trust, the surviving spouse must spend down the inheritance before the survivor is eligible for Medicaid. I’ve found no evidence of the degree the government pursues this. 

The only reason for a failure to provide for the surviving spouse by will that I’ve encountered is an ingrained desire by many estate planners to avoid the cost and time required for a probate administration.

To help protect the inheritance from LTC costs, the couple may be advised to use a planning method called “reverse trust funding” that claims it uses a will in circumstances in which the surviving spouse will need Medicaid. The couple inserts language in their living/revocable trust that provides that the decedent’s property passes to the executor of the decedent’s estate if the survivor needs, or is receiving, Medicaid benefits. Proponents of the reverse trust funding format argue that if the decedent’s assets are ultimately received by the decedent’s executor, they qualify for the “by will” exception provided by the federal statute.

I’ve found no authority, nor been directed to any, that sanctions the reverse trust funding format, and the format seems to needlessly risk the surviving spouse’s, perhaps permanent, economic protection for a transitory benefit. (If any readers have such authority, please let me know.)

Also, if the surviving spouse doesn’t need Medicaid benefits at the time of the other spouse’s death, the reverse trust funding format isn’t used, and if the surviving spouse later needs Medicaid benefits, it will be impossible to correct the failure to create the family trust by will.

Assuming probate avoidance is the reason for not using a will, depending on the facts and jurisdiction, property passing to a surviving spouse in the particular jurisdiction may not be subject to probate administration, resolving the resistance to probate.¹⁴         

Endnotes

1. See “Compare Long Term Care Costs Across the United Sates,” Genworth, 2016, www.genworth.com/about-us/industry-expertise/cost-of-care.html.

2. Transmittal No. 64-3258.9(B).

3. Deficit Reduction Act of 2015 (DRA) Section 6012.

4. DRA Section 6012(e)(1).

5. DRA Section 6012(e)(2)(A).

6. 42 U.S.C. Section 1396p(c)(1)(F)(i).

7. 42 U.S.C. Section 1396p(c)(1)(G)(ii)(III).

8. 42 U.S.C. Section 1396p(c)(1)(G)(ii)(I).

9. 42 U.S.C. Section 1396p(c)(1)(G)(ii)(II).

10. Supra note 3. 

11. Restatement of Trusts (Third), Section 58(1); Restatement of Trusts (Second), Sections 152(1), 153.

12. 42 U.S.C. Section 1396p(d)(2)(A)(ii).

13. 42 U.S.C. Section 1396p(d)(2)(A)(ii).

14. California Probate Code Section 13500. Except as provided in this chapter, when a husband or wife dies intestate leaving property that passes to the surviving spouse under Section 6401, or dies testate and by his will devises all or a part of his or her property to the surviving spouse, the property passes to the survivor subject to the provisions of Chapter 2 (commencing with Section 13540) and Chapter 3 (commencing with Section 13550), and no administration is necessary.