How a Tax Refund Can End Up Costing You Big

Janet and Murray have  been married for 50 years.  Murray is in advanced stages of Alzheimer’s Disease and Janet finally was forced to place him in a nursing home.  Murray recently received Medicaid approval and Janet got to keep the house and $100,000 in assets.   She filed a joint income tax return for 2010 and recently received a $10,000 refund check payable to her and Murray.  Janet’s question, or really statement to me, was “I can keep that money right”?  “No so fast”, I replied. 

 It’s a good thing Janet called when she did.  Half the refund is hers, no question, but the other half is Murray’s money.  If Murray now has $5000 isn’t that more than the $2000 Medicaid asset limit?  Will he now lose his benefits?  Or is it considered income to Murray, requiring him to turn it over to the nursing home?  Or is it possible that Janet can keep it all?

 This is a very tricky situation, and a clear illustration of how so complicated Medicaid is, even after you have been approved.  First of all, Medicaid rules state that an income tax refund is not considered income so giving Murray’s half to the nursing home isn’t necessary.  OK, so it’s an asset.  Well, then, can Janet keep it?  No, she can’t.  While she can keep any asset she had when Murray was approved for Medicaid (ie. the house and $100,000) and any asset she receives after that point (ie. her half of the refund), Murray cannot transfer his half to Janet.  He would lose is Medicaid benefits.  This is what is called a “post eligibility transfer”.

 So, what options remain?  Janet could spend the money for Murray’s benefit on things he needs, such as clothing, a TV, a companion to assist him etc.  However, she must spend it by the end of the month he received the refund.  Anything left unspent the following month will be added to his other assets.  If Murray is over $2000 in assets that next month he will lose his Medicaid unless he turns the money over to the state.

 It was a good thing Janet called when she did.  Can you imagine if she kept that $5000 and Medicaid found that out the next time she had to complete the paperwork to annually renew Murray’s eligibility?  Losing Medicaid would have cost her $10,000 a month, the private pay rate at the nursing home.  Janet could have potentially lost tens or hundreds of thousands of dollars, sending her to the poorhouse.  Luckily, she sought the proper advice.  But, it just goes to show you there are infinite ways that the Medicaid rules can trip you up.  The problem is you just don’t know what you don’t know.