Q. Would it be smart to put a vacation home into an irrevocable trust to avoid losing the asset if I’m incapacitated? What happens to the five-year lookback?
— Planning ahead
A. We’re guessing you’re asking about how to protect your property in case you ever need long-term care.
In northern New Jersey, for example, round-the-clock nursing home care can cost $12,000 a month or more.
If you don’t have long-term care insurance to cover that cost, you must use your own assets until you can qualify for Medicaid benefits, which may cover some or all of the cost of care depending on where that care is being administered, said Yale Hauptman, an estate planning attorney with Hauptman and Hauptman in Livingston.
Medicaid, however, is a needs based benefit.
Hauptman said you must have no more than $2,000 of countable assets to qualify, and the asset rules for married couples are a bit more complicated.
He said a primary residence generally doesn’t count towards the $2,000 limit as long as you or your spouse are living there. But the vacation home? That’s countable.
“Transferring it to an irrevocable trust drafted to meet Medicaid’s strict income and asset rules would allow you to apply for Medicaid without having to sell that home and spend down the proceeds,” Hauptman said.
But as you mentioned, there is a five-year Medicaid lookback rule.
“When you apply, the state will require you to produce five years of records for every asset you had to determine if you made any transfers for less than fair value, meaning you transferred an asset and did not receive something of equal fair market value back in product or service,” he said.
They add up all the transfers for less than fair value over the five-year time period, and divide that number by the average cost of care in New Jersey to calculate the Medicaid penalty, Hauptman said.
The penalty is a waiting period for benefits which only starts after you have spent down the rest of your money to less than $2,000 of the assets you didn’t transfer to the trust, applied for Medicaid and met all the other Medicaid requirements.
Transferring the vacation home to the trust would count as a transfer for less than fair value because you did not receive something back of equal value, he said.
“As long as you wait five years and a month to apply for Medicaid, however, the state won’t see that transfer because it won’t be within the five-year time period they are looking at,” he said.
Now to your question of whether it would it be smart to make the transfer, it depends on a number of factors:
How much other money do you have to cover the next five years should you need care? Is that money liquid should you need to spend it? What is your age and health now and how likely is it that you will need long-term care in the next five years? What is that cost likely to be? What other assets or income do you have to pay for care that may not be covered under a Medicaid program?
These are all questions that an elder law attorney knowledgeable and experienced in the areas of long-term care planning and Medicaid can help you answer, Hauptman said.
“The short answer is that there isn’t a one-size-fits-all answer,” he said. “An irrevocable trust may be a workable solution for one person but not for another. It all depends on the variables above.”
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