MEDICAID PLANNING FOR THE RICH

The problem with lawyers is, they make their rich clients artificially poor so they can qualify for Medicaid and get the American taxpayer to foot the bill for their care.

Well, not really. But, unfortunately, that’s what some people believe.

I can’t speak for every lawyer, but being a lawyer whose practice is dedicated to elder law, I think I know a bit about what most elder law attorneys see in their practices. What I don’t see is rich people seeking to qualify for Medicaid. Unless you consider an eighty-year old – whose entire estate is worth $250,000, including the value of their home – rich.

Medicaid is the only government program that will pay for long-term care. And, long-term care can cost anywhere from $3,000 to $7,500 a month. So, it’s very expensive. The fact that people would want to qualify for Medicaid if they require long-term care is not surprising. But the problem with funding the cost of long-term care is really a problem for the middle and working classes, not the rich.

The rich – for purposes of this column, I will consider people worth $1,000,000 or more to be “rich” – don’t have to go through the pain of Medicaid planning to pay for the cost of their care. You see, while Medicaid planning can be very helpful in preserving assets for the benefit of a nursing home resident and his family, the planning inevitably involves a tremendous loss of control.

Medicaid is a welfare program, so most of the techniques used to qualify a person for Medicaid involve giving a person’s assets away to other individuals, perhaps children. In my experience, a person who is worth $1,000,000 or more is not going to part with his money lightly, or unnecessarily. And it is unnecessary for a millionaire to plan for Medicaid.

People worry about the cost of long-term care when their income is insufficient to meet the cost of their monthly care. For example, if your care costs $7,000 a month and you have $1,500 a month in income, you have a $5,500 monthly deficit. Obviously, that’s a serious problem. After two years, the person would be $132,000 poorer. If their entire estate is worth $250,000, they would be more than half way to poverty, which is a very scary thought.

On the other hand, if someone with $1,500 a month in income and monthly, long-term care expenses of $7,000 had $1,000,000 in assets, they really wouldn’t have any problems paying for their care. They would still have the $5,500 deficit, but the $1,000,000 in assets could be invested in such a manner as to generate sufficient assets to cover most, if not all, of the deficit. If you invest $1,000,000 and receive a 5% rate of return, you would have an additional $50,000 of income each and every year. So, this person would now only have to make up a $16,000 yearly deficit. If they live five years in a nursing home before they passed away, they would still pass away with $920,000.

Even if the person had engaged in Medicaid planning, the result obtained by not planning may actually be better than the result that would have been obtained had the person engaged in planning. For example, assume that the person with $1,000,000 did Medicaid plan. Further assume that $700,000 of the person’s $1,000,000 in assets consisted of appreciated assets, such as stocks and real estate.

If the person gifted all of their assets away, they would qualify for Medicaid in three years, saving approximately $32,000 in my example. But the cost of gifting appreciated assets worth $700,000 in appreciated assets could easily cost their children who received the gifts hundreds of thousands of dollars in income tax, when the children sell the appreciated assets.

Most people who inquire into Medicaid planning are people who have worked hard their whole lives and who never thought they would need a welfare program in order to pay their bills. They are the American taxpayers that people believe Medicaid planners are trying to bilk.

What is unseemly is not the fact that people are planning to qualify for Medicaid, but the fact that people need to plan. As a people, we must provide for the care of our elders, not condemn them for trying to save a portion of their modest estates.