Medicaid Misconceptions

I have been assisting clients with applying for Medicaid benefits for over twenty years.  In that time, I have helped hundreds (probably thousands) of clients successfully apply for Medicaid benefits.

Medicaid is a health payment plan for needy individuals.  If a person qualifies for Medicaid benefits, Medicaid will pay for most of the costs associated with long-term care.  For instance, if Mrs. Smith is in a nursing home, the Medicaid program will pay for the nursing home; Mrs. Smith will only need to make a small income contribution to the nursing home each month.  Since a nursing home can cost upwards of $14,000 a month and since a person can need long-term care for years, Medicaid can confer a very large benefit on its recipients.

When it comes to Medicaid, there are very common misconceptions.  I get the same questions from clients, again and again.  My greatest concern with these misconceptions isn’t the fact that I have to answer the same question, repeatedly; my greatest concern is that my clients get bogged down in these misconceptions and the explanation of why they are misconceptions.  The problem with misconceptions is that for some reason people cling to them and are skeptical of explanations that contradict the misconception.

Here are few examples of common misconceptions.

“Can I sell my house to my children for a dollar?  My neighbor did this.”  When a person gives her house to her children, the deed often says that the transfer involved consideration of $1.  Consideration is needed to support a contract.  Consideration is something for something, quid pro quo.  I give you my house, you give me $1; therefore, there is consideration to support the transfer of the house from mom to her children.

Let’s assume that mom’s house is worth $300,000.  “Selling” her house for $1 isn’t really a sale.  Your mom wouldn’t sell her $300,000 to a stranger for $1.  The very fact that the client is asking me if she can “sell” her house for $1 tells me that the client knows she isn’t selling her house at all but giving it away.

If mom sells her $300,000 house for $1, she has made a $299,999 gift and a $1 sale.  Since the children never actually gave mom the $1, mom actually made a $300,000 gift.  Calling it a sale doesn’t make it a sale.  The Internal Revenue Service often uses a concept called “form over substance.”  That rule applies here.  You look at the substance of the transaction, not the form.  Mom gave her house away (that’s the substance of the transaction); she didn’t sell it (the form of the transaction).

This same rule applies with any asset you can think of.  “Can I sell my $30,000 for $5,000 to my son?”  This would be a $25,000 gift and a $5,000 sale, assuming mom actually gets the $5,000.

Second misconception: “I’m joint on a bank account with my mother, so that account is half mine, right?”  The account belongs to the mother and the child according to their contributions to the account.  If mom put all the money in the account, then all the money is hers.  If the son put some money in the account and if he can prove those contributions, then that portion of money he put into the account and that he can prove he put into the account belongs to him.

Third misconception: “Most of my parents’ money is in my mom’s name and dad’s the one who needs care, so my mom gets to keep all the money in her name right?”  When dealing with a married couple, the spouse who does not need long term care can retain a certain amount of cash assets, up to a maximum of about $130,000.  It’s wholly irrelevant which spouse has title to the assets.  The couple is one economic unit for purposes of Medicaid and the healthy spouse can only retain a maximum of $130,000.