What type of planning did you do for your parents? It is a question I get from my clients quite often. Both of my parents are deceased. Both lived to be ninety-four years of age. Both passed away in a nursing facility. My mother lived in a nursing facility for six years before she passed. My father lived in a nursing home for two years.

If my parents had paid privately for the nursing home, the aggregate cost would have been around $1,000,000. My parents never had $1,000,000; they were working class people. I never wanted for anything important in my life, and my parents paid for all my education, but they were never rich. (Well, they were rich in the sense that they had four great kids and nine even better grandchildren, but monetarily, they were not rich.)

Even though they never owned any asset of value other their house, because of the planning I did for my parents, they were able to pass their house on to their children. This was important to my parents who literally grew up during the Depression.

So, what did I do for my parents? This is what I did for them, and this is what I recommend everyone consider.

A financial power of attorney. This is the most important document. When you sign a power of attorney, you are the “principal.”  The person you name to make decisions for you is your “agent.”  Typically, a principal names his spouse as his agent; if the principal is unmarried, then he names one of his children as his agent.

Without a power of attorney, no one (not your spouse, not your children) can make financial decisions for you. The power of attorney needs to be comprehensive. It needs to cover any financial transaction you may ever possibly need to have made for you. It needs to permit your agent to gift your assets to qualify for Medicaid benefits.

A substantial portion of my practice involves Medicaid planning. Medicaid planning is a form of planning in which an individual or couple attempts to preserve a portion of their assets for their themselves or their family.

Medicaid planning always involves a gift—a gift to the spouse, a gift to the children. If the power of attorney fails to permit gifting of the principal’s assets, then the power of attorney agent cannot gift. If the agent cannot gift, then the agent cannot engage in Medicaid planning on behalf of the principal. I had a comprehensive power of attorney for my parents, so I was able to help them engage in Medicaid planning when the time came.

For many of my clients, I recommend planning for potential Medicaid planning by transferring a portion of their assets into an irrevocable trust for the benefit of their children. This type of planning takes advantage of the five-year lookback period.

Medicaid is a means-tested medical assistance program that will pay for the costs of long-term care—care in a nursing home or in an assisted living residence or pay for a home health aide. To qualify for Medicaid, a person must have a limited amount of assets. If you give away assets to qualify for Medicaid, the Medicaid program will punish you by making you ineligible for Medicaid benefits. Only gifts that you make during the five years prior to applying for Medicaid benefits can be punished. This five-year period before the date of application is the “lookback period.”

If you transfer any amount of assets five years prior to applying for Medicaid benefits, then Medicaid cannot punish you for making the gift. For instance, if Mr. Smith gives away $200,000 sixty-one months or more prior to applying for Medicaid benefits, then Medicaid cannot punish this $200,000 gift.

For my parents I transferred their home to an irrevocable trust for the benefit of their four children. I reserved for them the right to live in their home for the remainder of their lives. I did this more than five years prior to applying for Medicaid benefits. This transfer saved their home from the cost of the nursing home.