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Giving ’Til It Hurts
By Ric Edelman, March-April 2004
He wants to give away his assets so he can qualify for Medicaid. He’d better think twice
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Walter Topper, 73, is a widower. He retired eight years ago and
now spends most of his time volunteering for Meals on Wheels. He
has one son, Jed, 49. While he enjoys good health, he doesn't
want to become a burden to his son and daughter-in-law if, one
day, he is no longer able to care for himself. Walter is thinking
of giving his retirement savings to Jed now and also signing over
his house to his son, although he wants to continue living there
for the rest of his life. Why give up ownership? He wants to
protect his finances in case he becomes ill. Current rules say
that Walter would have to spend most of his assets to pay for
long-term care before Medicaid kicked in. So he figures that by
giving his assets away today, he would immediately be eligible
for Medicaid.
Strengths
Walter's home is worth $195,000; there is no mortgage. His
monthly income from Social Security and a small pension is
$2,000. He has an IRA worth $45,000 invested in CDs.
Weaknesses
Walter has no long-term care insurance (and it would be too
costly to get now). He hasn't updated his will in 30 years,
and his only medical insurance is Medicare Part A, which helps
pay for hospital expenses.
The Plan
My recommendation to Walter is to abandon his plan to shed all
his assets. If he won't, he should at least consult an
elder-law attorney before making any moves. Trying to qualify for
Medicaid this way is called asset shifting, and although a great
number of people do this, it's quite risky.
Naturally, Walter wants his life's savings to go to his
family, not to a nursing home. But if Walter gives the house to
Jed, he could end up homeless. How? If Jed is sued or gets
divorced, he might be forced to sell the house. Or Jed could
simply give his old man the boot after a falling-out. Long shots?
They happen every day. It's often the spouses of the children
who evict the parent, because they are less attached.
Asset shifting has a risk of failing, too. If Walter makes a
claim to Medicaid, the government can check to see if he's
given away assets in the last three years, and may declare him
ineligible for a period of time if he has. There are some valid
reasons for asset shifting, such as to help relatives in
financial trouble or to cut taxes on large estates. But these
don't apply to Walter. Likewise, he shouldn't touch his
IRA. It's his emergency fund, and he may live another 20
years. He should withdraw the minimum required by the IRS
(currently about $1,800 a year for him) and reinvest it in CDs.
To increase his medical insurance, Walter should apply for
Medicare Part B, which pays expenses such as doctors' visits.
Premiums are now $66.60 a month for those who enroll at age 65,
but Walter missed the boat. Now, he can enroll only between
January 1 and March 31 of each year, and he'll pay more:
Medicare Part B premiums generally increase 10 percent for each
year a retiree postpones applying (he'll pay about $120 if he
applies in 2004).
To pick up expenses that Medicare Parts A and B don't
cover—such as deductibles—Walter should apply for a
Medigap policy; he
can get details by calling 800-633-4227 or by visiting Medigap.
Finally, Walter must update his will and get a medical directive
and durable power of attorney for health care (to ensure his
medical decisions are carried out). An estate-planning attorney
can do this. By following this advice, Walter should be able to
live comfortably and keep Uncle Sam happy too.
Ric Edelman is president of Edelman Financial Services and the
author of The Truth About Money.
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