While moving into a nursing home means losing one’s independence, the fact of the matter is, this can also be a huge financial drain on your estate and your family.

It’s not uncommon for elder adults to pay for nursing home care until after their savings have run dry. While paying privately gives you the advantage of going into a nicer facility, the disadvantage is that is can be extremely expensive. Therefore, it’s absolutely critical that you plan carefully in advance.  This is crucial so you can be in control and protect your estate, whether you intend to pass it on to your spouse or your children.

In the United States, Medicaid is the main long-term care plan that is utilized by aging Americans. In the absence of having access to a long-term care insurance policy, the majority of people will pay out of pocket for their long-term care until they are finally eligible for Medicaid. Because Medicaid is a form of welfare, a person needs to become impoverished under the program’s guidelines in order to qualify.

Medicaid has what is called the “lookback” period. At this point in time, the lookback period is 5 years prior to the month that you are applying for coverage for nursing home care. This means that a penalty period may be imposed for the transfer of non-exempt assets for less than the fair market value.

The penalty results in a period of ineligibility for Medicaid coverage for nursing facility services. However, a penalty period doesn’t apply to the transfer of your home to the following individuals: 1) your spouse, 2) a child under the age of 21, 3) a sibling who has an equity interest in the home and who has lived in the home for at least a year prior to you entering into a nursing home, 4) an adult child who lived in the home for at least two years prior to you entering into the nursing home and who cared for you, which allowed you to remain home instead of entering into a nursing home, 5) your child who is blind or permanently disabled, and 6) into a trust for the sole benefit of anyone who is under 65 and permanently disabled.

If you are not yet in need of long-term care, then you have the luxury of distributing and protecting your assets in advance with careful and meticulous planning. With proper planning, when the time comes and you are in need of long-term care, you will be able to quickly qualify for Medicaid benefits instead of having to wait 5 years. Since every person’s situation is different, “Medicaid planning” will vary from person to person. Some people are married, while others are not, some people have children, while others don’t. Therefore, it will be necessary to discuss your situation with a qualified estate planning attorney.

All transfers of your property should be made carefully and with a full understanding of all the consequences involved. Such consequences to be considered include: probate, estate taxes, the lookback period, and capital gains taxes. You will need to take into account all of income and all of your expenses before making any transfers.

If you are a homeowner who is entering into a nursing home facility, it’s important to understand the implications of Medicaid estate recovery. If your home is not properly protected, then it becomes susceptible to Medicaid estate recovery. Once you receive Medicaid, the state must recover the money spent by Medicaid for long-term care, and they have the option of recovering costs of all Medicaid services that were paid on the recipient’s behalf. In general, states will recover the money spent on long-term care and other related expenses from the decedent’s estate. Therefore, when home equity becomes a part of the estate, then it is automatically subject to Medicaid estate recovery unless actions are taken ahead of time to protect the property form Medicaid estate recovery.

One way to protect your estate from Medicaid estate recovery after you die is called an irrevocable trust. In most cases this trust is drafted by you, the “grantor” so that the income is payable to you for life; however, you cannot use the principle to your benefit or the benefit of your spouse. The funds will be protected and when you pass, the principle will be automatically passed on to your heirs. While you are still alive, the income from the home is protected and you can still use the income for your expenses. If you do eventually need to move into a nursing home, the income from the trust will go towards the nursing home for your care. With an irrevocable trust, you will not have access to the trust funds if you need them for something other than nursing home care.  You need to plan ahead so that you have a decent cushion outside of the trust for other living expenses.

When weighing whether or not to place your estate into an irrevocable trust or a life estate, you will need to discuss your situation with a qualified attorney. By setting up an irrevocable trust or a life estate you may be able to avoid your estate going into probate, and thus avoid having your property subject to Medicaid estate recovery. This can save your heirs a significant amount of money in the long run. By carefully planning ahead, you can maximize your estate while having full access to the Medicaid system.