Avoid the Medicaid Trust Abyss

Bad advice can make qualifying even harder.

By Kimberly Lankford, Contributing Editor

From Kiplinger's Personal Finance magazine, February 10, 2004

Edith Allison didn't want to spend her entire $120,000 in savings on herself. She wanted to help her great-grandchildren pay for college. But, in her mid eighties, and in declining health, the Colorado Springs woman had to move into a nursing home. Watching her nest egg disappear at a rate of $3,000 a month, Edith and her son, Donald, were particularly susceptible to an attorney's flier promising to "protect your home and assets from nursing-home costs."

At a seminar in November 1998, Donald was told that setting up a trust would immediately qualify his mother for medicaid, which would then pay the nursing-home bills. He paid Colorado Springs attorney Robert Mason, who put on the seminar, $1,950 to set up the trust and transfer his mother's assets into it.

But Edith kept shelling out $3,000 a month to the nursing home, and Donald spent months trying to contact Mason about the status of his mother's medicaid application. In June 2000, he was stunned to learn that the application had been denied eight months earlier because she had too much money to qualify. The problem, Donald learned, was that Mason had set up a revocable living trust, not an irrevocable one. Therefore, all of the assets in the trust still counted in the medicaid calculations. Edith eventually qualified for medicaid -- but only after spending her entire $120,000 on nursing-home costs. She died in July 2003, at age 91.

Allison and her son weren't the only ones to be misled. About 700 people paid Mason and his colleagues to set up similar trusts. Ultimately 350 of them filed complaints with the Colorado attorney general's office.

In fact, some people had an even tougher time qualifying for medicaid than if they hadn't set up a trust at all. Marjorie Spiers, 76, attended one of Mason's seminars in 1999. "They said I wouldn't have to buy long-term-care insurance because I wouldn't own anything, and the state would cover everything for you," says Spiers. "That was a relief to me because I couldn't afford $300 per month for the insurance. I thought this was a great deal."

But when she showed the plan to attorneys at a legal seminar for seniors in 2000, they discovered some serious flaws. In Colorado, a house usually doesn't count when determining whether you have few enough assets to qualify for medicaid. "But by putting it into a revocable living trust, a house that was an exempt asset becomes nonexempt because now it's in the trust," says Assistant Attorney General Jay Simonson.

The attorney general's office filed a consumer-fraud case in November 2001, alleging that Mason and his colleagues knew their plans wouldn't help people qualify for medicaid. After a three-day trial in August 2003, Mason was found guilty of violating the Colorado Consumer Protection Act. He was awaiting an assessment of damages as we went to press in late December.

Strategies that work

The fact that hundreds of people paid up to $2,500 for worthless trusts was only part of the problem. More important for many, perhaps, is that they also lost valuable time to make other plans that could have really protected some of their money for their heirs.

"I can't afford long-term-care insurance now," says Marjorie Spiers. "It would have been $300 per month in 1999. Now I'm 76, and it would be about $500 per month. I can't afford that on my social security checks."

It is possible to protect some of your assets and still qualify for medicaid, but the rules are strict. When you apply for medicaid, the state agency looks back to see if you've given away any money over the past three years (or five years if you've set up a trust). If you have, they'll divide the amount transferred by the average monthly nursing-home cost in your state. The result is the number of months you're ineligible for medicaid assistance. In other words, medicaid will not kick in until after a period equal to the time you could have paid for your care if you hadn't given the money away.

Still, with careful planning, Edith Allison could have saved about half her money for her great-grandchildren, says Harry Margolis, an elder-law attorney in Boston. She could have given away half of her savings -- $60,000 -- to her son, great-grandchildren or anyone else (other than a spouse or disabled child) when she entered the nursing home. Using $4,424 as the monthly nursing-home cost (the Colorado number for early 2003), Allison's gift would have made her ineligible for medicaid for 13.6 months. Paying $3,000 of her own money each month during that period would have used up $42,000. After spending her remaining savings to a state-set minimum, she would have qualified for medicaid.

The medicaid rules vary from state to state and can be quite tricky, so it's important to work with an elder-law attorney in your area before making any moves. The National Academy of Elder Law Attorneys can help you find a local member.

Although medicaid-planning strategies can help, Margolis generally recommends buying long-term-care insurance if you're healthy and can afford the premiums. That will give you more alternatives in choosing the care you need. The price may be right, but medicaid pays for little or no home health care in most states. Few assisted-living facilities accept medicaid, and even fewer provide private rooms, says Marilee Driscoll, author of The Complete Idiot's Guide to Long-Term Care Planning. "It's quite breathtaking the difference between the private-pay rooms and the medicaid rooms," she says.

--Reporter: Joan Goldwasser

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