Planning Before the First Spouse Dies

            Mary called because her mom was in a nursing home paying $11,000 per month. Her sister, Terry, disabled and living with Mom for many years, had her own health problems and was now living in a group home.

            I asked about her mom’s finances. Mary told me she owned a home worth $450,000 and had another $175,000 in liquid assets. Mary’s question to me was “Can we save any of Mom’s assets and qualify for Medicaid?” Mary was concerned about how to care for Terry. She pointed out that “Mom’s will leaves everything to me so that I can use some of those funds for Terry’s care”.

            I explained that unfortunately this doesn’t help now. If Mom passes away, Mary will inherit what is left of Mom’s estate and she can use those funds to help care for Terry without concern that Terry will have to spend down those assets before qualifying for Medicaid or fear of losing Medicaid if she already is receiving it. That’s because the assets will never pass to Terry.

            The problem, however, is that Mom currently owns them and can’t qualify for Medicaid to cover her own care until she either spends down the assets or otherwise transfers them under one of the Medicaid exceptions to the transfer penalty rules.

            I told Mary that because Terry has been deemed disabled by Social Security, under the disabled child exception assets can either be transferred to her outright or to a trust for her benefit. Mary quickly replied that because Terry can’t manage money and the fact that she currently receives Medicaid herself an outright transfer wouldn’t work and I agreed.

            Transferring to a trust appeared to be the only option but I then explained to Mary that whatever is transferred to the trust could only be used for Terry’s benefit. If Mom intended to leave some but not all of her estate for Terry’s benefit with the rest going to Mary, we cannot accomplish this with the trust, which must be for the sole benefit of Terry. Only after Terry passes away will Mary receive whatever remains in the trust.

           Mary was faced with a dilemma.  Had Mom and Dad did some planning while Dad was still alive, however, there could have been a better choice.  Next week I’ll explain how that scenario could have looked.