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What is a Medicaid spend-down?

If your parents have health issues and/or are approaching the age where you and they fear they may need to take up residence in a Colorado nursing home or assisted-living facility, you may already be worrying about how they will pay the costs that such care entails. Few people can afford the extraordinary costs of long-term care even if they are reasonably well off financially. The vast majority of people need to obtain Medicaid.

Medicaid itself, however, presents you and your parents with a whole new set of issues. First and foremost, your parents must qualify for Medicaid benefits. Unfortunately, most Medicaid programs require that anyone applying for Medicaid must be “indigent” in order to qualify for it. What this means is that together, your parents must own no more than $4,000 worth of assets. Whatever their current financial situation, it is highly likely that they own considerably more than that very small amount. So now what do you do? The answer may be a Medicaid spend-down

Look-back period

A Medicaid spend-down is a deliberate but perfectly legal way for your parents to “impoverish” themselves so as to qualify for Medicaid. However, if you intend to do a spend-down, you should begin as soon as possible. Why? Because under the 2005 Deficit Reduction Act, Medicaid personnel have the right, indeed the obligation, to review your parents’ financial records and dealings for the five-year period prior to the date on which they apply for Medicaid benefits. Should anything “fishy” appear that looks like it might have been a sale, transfer or gift made with the intent of impoverishment, this will disqualify your parents.

Irrevocable trust

Your best strategy is to explore the possibility of your parents setting up an irrevocable trust into which they place virtually all of their assets. An irrevocable trust is safe, secure and makes a wonderful Medicaid spend-down vehicle. As soon as your parents transfer their assets into their trust, they no longer own those assets outright. Instead, the trust owns them, and your parents now meet the indigency eligibility requirement for Medicaid benefits.

Bear in mind that just because your parents’ irrevocable trust owns all their assets, this does not mean that your parents will not continue to receive the benefits of those assets and any income they may produce. They will. By appointing a trusted person such as yourself as the trustee and designating themselves as the trust’s beneficiaries, your parents simply turn over legal title of their assets to the trust, retain equitable title in the assets, and trust you to do what is right in terms of managing and dispersing those assets and the income they produce to themselves as necessary.

Trustee considerations

The irrevocability feature of the trust means that your parents cannot change it or revoke it in the future. Therefore, they give up all rights to ownership and control of their assets. This makes them dependent on you, as trustee, to see to it that they receive what they need when they need it. This, in turn, places a huge responsibility on you to take financial care of your parents both now and if they move to an assisted-living facility or nursing home five or more years from now.

Make sure that you are up to the task of becoming your parents’ trustee before agreeing to take it on. If not, consider having your parents appoint a different trusted family member as their trustee. Another trustee option might be your parents’ bank, financial planner, or some other professional money manager.

In any event, be sure to seek and obtain good estate planning advice with regard to all aspects of your parents’ irrevocable trust. While it is a valid Medicaid spend-down solution, you must make sure that it meets all federal and state legal requirements. Working with an attorney can help you make these decisions.

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