Four Basic Principles – Medicaid Made Simple

Bigstock-Child-Blocks-Height-480846-200x300Many people are confounded by the complexity of Medicaid. The truth is, Medicaid is quite simple. It’s a set of rules, exceptions and exceptions to the exceptions, but all are founded on four basic principles. First, understanding the rules, second, determining if the client meets the eligibility requirements, or if there’s an excess amount to “spend down”, third, determining the spend down method and fourth, implementing the funding plan.

Understanding the rules really comes down to these basic concepts. The difference between the institutional spouse and the community spouse, the income allowances (minimum monthly maintenance needs allowance a/k/a MMMNA), the community spouse resource allowance (CSRA), the look-back period, the monthly divisor, spend down, the penalty period, compensated transfers, uncompensated transfers and all the allowances and exemptions. The exemptions include protections of your principle residence, for a spouse or disabled or minor child, an automobile, a prepaid funeral and life insurance up to $1,500. All Medicaid determinations are based on these concepts. Once you have a clear understanding of the application of the rules regarding these key terms it will determine whether an individual is Medicaid eligible.

The second principle determining whether the client meets qualifying conditions (That is, are they citizens and a resident of the state?), are broken down into three parts; legal, health and financial. Do they need care that is covered by Medicaid, and do they meet the income and asset limitations? If the client does not meet the legal or health criteria they will not qualify. If they exceed the financial limitation, they must “spend down” their income or assets to the qualifying levels.

The third principle, the method of spending down can have two results: One leads to a penalty and ineligibility for Medicaid (“uncompensated transfer”) and the other type of spend down does not (“compensated transfer”). Qualified (“compensated”) spend downs will not penalize the applicant as they are deemed to be exempted transfers under the law. Such an example of a qualified spend down would be the Medicaid applicant making an improvement on their principle residence, or purchasing a car, a prepaid funeral or paying off debts. Uncompensated transfers are when an individual gives assets away and receives nothing, or less than what was given, in return. In these circumstances, the individual will be penalized and made ineligible for Medicaid depending upon the uncompensated amount given away and the monthly divisor in the community in which they live. What’s critically important to understand is a penalty assessed for an uncompensated transfer can far exceed 60 months and doing an uncompensated transfer does not disqualify your for 60 months. Other methodologies to spend down include the use of annuities, Special Needs Trust, Personal Services Contracts, trusts “solely for the benefit of your spouse, or disabled or minor child, or promissory notes. A combination of these spend down methods may be utilized in qualifying a client.

Finally, once you have applied the rules, utilized the exemptions and completed your spend down strategy, none of it is effective without a funding plan. Unlike traditional estate planning where funding could get “cleaned up” after death by a pour over will, in Medicaid planning, none of the penalties or planning is effective until the funding has been completed. It is absolutely critical that you have a complete funding strategy in place once you create the plan to ensure the plan you create is actually going to work.

Did you even think Medicaid could be explained in less than 350 words? You just read it and it’s not as complicated when you have a structure, such as outlined here, to apply to each case. I will be rolling out such a structure with National Veterans Benefits Expert, Victoria Collier, on April 30th and May 1st in Atlanta, Georgia. For information click here. Hope to see you there!

Dave Zumpano

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