How should my father balance estate planning, tax planning, and Medicaid look back rules?

A fellow caregiver asked...

My father is going to redo his will this year. He has some assets, primarily in his house and his savings accounts, which are worth about $100,000 total. He wants to leave a significant legacy to his kids and grandkids in a way that will shelter his assets from taxes as much as possible. He's also worried about qualifying for Medicaid in case he ever needs nursing home care. Is there a way to balance and prioritize estate planning, tax planning, and Medicaid look back rules?

Expert Answer

Steve Weisman hosts the nationally syndicated radio show A Touch of Grey, heard on more than 50 stations, including WABC in New York City and KRLA in Los Angeles. He is a practicing lawyer specializing in estate planning and is admitted to practice before the United States Supreme Court. He's a public speaker and commentator who has appeared on many radio and television shows throughout the country, and he's the legal editor of Talkers magazine, the preeminent trade publication of talk radio. His latest book is The Truth About Avoiding Scams.

To sort out these competing issues, your father first needs to figure out his estate tax situation. The federal estate tax doesn't kick in for estates under the $2 million threshold, so he doesn't have to be concerned about federal estate taxes. He'll have to look at what the individual estate tax is in his state -- but where I live, for example, the threshold is $1 million, so chances are your father won't have to worry about either state or federal estate taxes.

He does need to consider the possibility that he'll eventually have to go to a nursing home and need Medicaid to pay for it. The Deficit Reduction Act (DRA) of 2005 drastically changed the way financial planning could be done. In the past, he would have been able to give financial gifts to his children and grandchildren and not worry about those gifts disqualifying him for Medicaid. Now there's a five-year "look-back" period, which means that the state Medicaid authorities will inspect financial transfers and gifts going back at least five years, and penalize him by delaying his Medicaid eligibility if there are any transfers within that period.

In your father's situation, the house is probably his biggest asset. If he wants to stay in his home, he should talk to an estate planning or elder-law attorney about putting it into an irrevocable trust now. By putting the house in such a trust, he could shelter the home as an asset from Medicaid five years from now. Whatever the house's value, it will pass to his children or grandchildren at his death without going through timely and expensive probate (or, in qualifying cases, estate taxes). If he decides to set up such a trust, he should be very clear about the legal implications should he ever have a change of mind.

Because of the Medicaid look-back rules, if you're going to do any type of estate planning or Medicaid planning, the earlier you can do it, the better. Putting his house in an irrevocable trust now is probably the biggest opportunity your father has to protect his assets and still qualify for Medicaid in five years.