The Medicaid Spend Down

Medicaid is a health insurance program for needy individuals. Unlike most policies of health insurance, Medicaid will pay for long-term care, such as care in a nursing home. In order to qualify for Medicaid, an applicant must have limited resources and insufficient income to pay for her care.

Typically, an applicant for Medicaid can have no more than $2,000 in countable resources. Countable resources are all resources the person owns and that can be used to pay for his support and maintenance with the exception of certain resources that are deemed to be non-countable.

Non-countable resources are the house, a car, personal goods and household effects, and certain small policies of life insurance; however, a house only retains its non-countable status if the applicant, his spouse, or a family dependent is living in the house. If the applicant is a single individual who is residing in a nursing home and no family dependent is living in the home, then the home has to be sold.

Until the house is sold, the applicant can receive Medicaid benefits contingent upon his listing his house for sale. Once the house sells, the proceeds are countable resources that have to be spent down in order to re-qualify the person for Medicaid benefits.

If a spouse is living in the home, then the home remains a non-countable resource. It is irrelevant how much the house is worth. Theoretically, a million-dollar home would be a non-countable resource if the well-spouse were residing in the home.

One technique people use in order to qualify for Medicaid benefits involves converting countable resources (such as bank accounts, stocks, bonds, annuities) into non-countable resources (such as a home, a car, or personal good and household effects). I often counsel clients to purchase items that would be considered non-resources if they need those items.

For instance, if the wife is in a nursing home and the husband needs a new car, then the husband, in my opinion, should purchase a new car now and not put off the purchase off to a later date. By purchasing the car, the husband can convert a substantial amount of countable resources into a non-countable resource.

Perhaps the husband needs to make home improvements that he’s been putting off. His house may need a new kitchen or a new bathroom or the home may need new carpeting and paint. In my opinion, it is best if the husband purchases those items as part of his “Medicaid spend down” as opposed to putting those repairs/renovations off to a later date.

The husband may wish to purchase some new furniture or a new computer. Those items would be non-countable personal effects and household goods. So, he should do that sooner rather than later.

What I do not recommend is that a person needlessly spend his money on items he does not want. Cars and personal goods are not good investments. They frequently lose their value quite quickly, so purchasing expensive, unwanted items is not part of a well thought out plan to qualify for Medicaid.

While other options to preserve money, which typically involving gifting, may be viewed as more aggressive by the Medicaid office, techniques involving gifting have proven themselves viable for years now. So, while a “Medicaid spend down” is part of a good a Medicaid planning, it is in no way the be-all and end-all of Medicaid planning.

Should We Kill the Estate Tax?

New Jersey has two death taxes–the New Jersey estate tax and the New Jersey inheritance tax. Only one other state, Maryland, has an estate and inheritance tax.

In New Jersey, an estate with a gross value exceeding $675,000 is subject to the New Jersey estate tax. The gross value of the estate would include all assets that the decedent owned–his house, his IRAs, his stocks and bonds, and the death benefit of his life insurance.

New Jersey’s inheritance tax is primarily based upon the relationship of the beneficiary to the decedent. The more distant the relationship, the greater the chance the inheritance tax will be imposed. For instance, a spouse, children, and grandchild will not pay inheritance tax. Nieces and nephews, cousins, and friends are subject to the tax.

For many years, some politicians have been attempting to repeal one or both of these taxes or to raise the threshold at which a decedent’s estate would pay the tax to such a high level that few, if any, estates would ever pay the tax. For instance, there is a push to raise the credit exemption against the New Jersey estate tax from $675,000 to the amount of the credit against the federal estate tax, which is currently $5,430,000.

Since very few people are worth $5,430,000 and since a couple could easily shelter $10,860,000 (or two times $5,430,000), the chances of an estate paying tax if the credit against the tax were that high are somewhere between slim and none.

Politicians who seek to repeal these taxes claim that people are fleeing New Jersey for more tax-friendly states, such as Florida. Florida has no death taxes. The politicians claim that when a person flees New Jersey to avoid death taxes, the State loses the income taxes that otherwise would have been imposed on that taxpayer and that the income tax the State loses is far more valuable than the estate tax that will be imposed against the taxpayer’s estate.

That’s a fine argument. The problem with the argument is, it is completely unsubstantiated and probably has no basis in reality.

A large part of my job for the past fifteen years has been helping people minimize or eliminate the impact of estate tax on their estate. I have counseled thousands of people. I have never had a client who was not otherwise leaving the state say to me that they would be willing to leave the state in order to avoid New Jersey death taxes.

Some clients are already half way (or more) into another state, such as Florida, and may decide, for instance, to live six months and a day in Florida instead of five months in order to avoid New Jersey’s death taxes. But no client has ever substantially altered their living arrangements in order to avoid the taxes.

Now my “study” isn’t scientific, but my experiences are far greater and far richer than most people’s experiences, including our great state’s politicians. So, to me, it’s fine to say, “I’m going to eliminate death taxes.” We all like fewer and lower taxes, but I think people should do it for a legitimate reason, and they should have a plan for how they are going to make up the lost tax revenue.

New Jersey’s death taxes bring in about $700 million of New Jersey’s $2.7 billion in tax revenue. That’s almost 3% of the total tax revenue. Since you can bet that Governor Christie isn’t going to raise income taxes, from what source is the lost revenue coming?

I don’t know about you, but I’d rather faces a tax for which I can plan to avoid or reduce and that only impacts me after I die than a tax for which I cannot plan to avoid and that impacts me during my life.