Avoiding Medicaid Estate Recovery by Planning for Special Needs Family Members

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You are probably aware of how expensive nursing home costs are in this country, and that they will likely only continue to increase. You may also know that in order to meet those rising costs, more and more nursing home residents need Medicaid to help pay for care.

Unless you've had a family member pass away after receiving Medicaid benefits to help pay for their nursing home care, you may be less aware of the Medicaid estate recovery program. Essentially, this program, instituted in Ohio a few decades ago, allows the state to recoup funds it paid out in Medicaid benefits from the estate of a deceased recipient. Even more recently, the state expanded the notion of what assets qualified as recoverable under the Medicaid estate recovery program. Whereas the Medicaid estate recovery originally could recover only probate assets, the state later implemented an "augmented estate" approach that allowed the Medicaid estate recovery program to claim against assets in which the Medicaid recipient had a legal interest in the moment before his or her death. These include living trusts, jointly held bank accounts, and jointly held real estate.

The expanded reach of the Medicaid estate recovery program is a source of concern to anyone who may someday need nursing home care, and who wants to leave their hard-earned assets to their loved ones. But the situation takes on an extra urgency when those loved ones have special needs. How will you provide for a special needs child, grandchild, or sibling if the state claims your assets as reimbursement for Medicaid payments?

Finding a "Safe Harbor" for Your Loved Ones

The augmented estate concept means that the state can claim against more of your assets than before the approach was adopted. However, it doesn't mean that the state can claim against ALL of your assets, if you structure transfers in such a way that they are permissible under state and federal law. Remember that the augmented estate includes assets to which you have a legal right or interest in the moment before your death. If you transfer assets for the benefit of, say, a child or grandchild with special needs, in such a way that you no longer have a legal interest in the property, those assets should not be subject to Medicaid estate recovery. Such transfers are known as "safe harbor" transfers.

It should be noted here that if you have a child who is blind or totally disabled according to Medicaid regulations, no Medicaid recovery against your estate should take place during their lifetime. That said, you should not assume that there is nothing you should do to protect their interests further.

One thing you may want to consider is the creation of a third-party supplemental needs trust. The term "third-party" indicates that the assets of a third party (you) are being placed in trust for the person with special needs. Once the assets are in the trust and you do not have the right to remove them, they are safe from estate recovery.

Benefits of a Special Needs Trust

Not only does the creation of a supplemental needs trust (also known as a special needs trust) help protect assets you want to use for your loved one from Medicaid estate recovery, but it can help protect your loved one's benefits, too.

Many individuals with disabilities or special needs rely on government benefits to survive. Some of these benefits are tied to income or assets, meaning that if income or assets exceed a certain amount, the recipient will lose eligibility for benefits, which could be disastrous. Even when a disabled person regains financial eligibility for a benefit, they may not be able to immediately resume receiving the benefit, and may have to go on a waiting list. However, a supplemental needs trust or special needs trust will enable them to receive regular income that from assets that are being managed and protected for them, without jeopardizing their eligibility for benefits. In addition, removing these assets from your own control by placing them in an irrevocable trust can, if done soon enough, prevent these assets from being "countable" for purposes of your own future Medicaid eligibility.

If you have a loved one with special needs who is likely to need assistance and government benefits, speak with an estate planning attorney about establishing a special needs trust. You should also let the attorney know of your other estate planning goals, such as protecting assets from Medicaid estate recovery; he or she may be able to help you find other safe harbors with which to protect assets for your loved ones.

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