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What is a Medicaid spend-down?

If your parents are elderly and living in New York, you may worry that they will have to move to an assisted living facility or even a nursing home sometime within the next decade. Few people, likely including your parents, have the financial means to pay for such living arrangements, and applying for Medicaid often is the only option.

While Medicaid does pay for the costs of long-term care, not everyone meets Medicaid’s eligibility criteria, particularly the one requiring indigency. Unfortunately, to qualify for Medicaid, your parents must have no more than $4,000 worth of joint assets. Even if your parents are not wealthy, it is highly likely that they have accumulated more than this paltry sum over lifetimes of hard work and saving. So what can you and they do? The answer may be a Medicaid spend-down.

“Look-back” period

A Medicaid spend-down is perfectly legal, but it represents a complicated undertaking that definitely is not a do-it-yourself project. You need the knowledgeable advice, counsel and help of an experienced estate planning attorney. And you need it soon because your parents' spend-down must take place well in advance of the time they actually apply for Medicaid.

Per the Deficit Reduction Act of 2005, when your parents apply for Medicaid, the joint state and federally funded program for financially limited people, the government can closely scrutinize their financial and other documents pertaining to the five-year period prior to their Medicaid application. If Medicaid personnel determine that any of your parents’ gifts, property transfers, etc. during this period represent a deliberate attempt to impoverish themselves, they likely will deny your parents’ application.

Irrevocable trust

A properly drafted irrevocable trust can give your parents the vehicle and methodology they need to solve this problem. Once they place their assets in this trust, they no longer own them and therefore become “impoverished” for Medicaid purposes. The trust owns the assets, and the trustee manages and distributes them. By naming themselves the beneficiaries of the trust, however, your parents continue to benefit from the assets and the income they produce.

Trustee considerations

Since your parents’ trustee will virtually control their financial lives from now on, choosing their trustee wisely becomes their most important decision. Most people designate a trusted adult child as trustee, while others designate a financial institution. Again, your estate planning attorney can provide the needed advice and counsel to ensure that your parents make a fully informed choice.

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