Intimidated No More by Colorado Medicaid
Several months ago I wrote an article telling you about the problems that Colorado lawyers have been having with Medicaid regarding the use of irrevocable income-only trusts. The Colorado Medicaid office is doing everything possible to prevent Colorado seniors from engaging in advance planning by transferring their assets to these trusts (which we call “Five-Year Trusts”).
The law allows seniors to transfer their assets to protect them if the transfer is made five years before an application for Medicaid benefits is filed. Transferring assets directly to children is the simplest way to accomplish this planning objective; however, transferring assets directly to children subjects those assets to the problems the children may have either at the present time or in the future, including divorces, debt problems, law suits and irresponsible behavior. Outright transfers of property to children also causes gift tax and capital gains tax problems for both the parents and the children. When it comes to a residence that’s transferred outright to the children, the family can lose the $250,000 or $500,000 exclusion from capital gains taxes if and when the house is later sold. The Five-Year Trust avoids these sticky tax problems and is the preferred technique for transferring assets five years in advance of needing nursing home care.
Unfortunately, as I reported previously, Medicaid doesn’t like seniors using these trusts. They view the use of these trusts as “gaming” the Medicaid system. Colorado Medicaid, however, allows seniors to use Five-Year Trusts, provided these trusts do not allow the senior to reaquire any of the assets originally transferred to the trust. In other words, once the assets have been given away to the trust, they can never be returned to the senior. The Five-Year Trust is designed to prevent the return of trust assets to the senior.
This requirement does not present a problem to most seniors who are intent on leaving an inheritance to their children. Most seniors are willing to forego the return of their residence as long as they have the lifetime right to live in it. Further, most seniors are okay with the idea of transferring most of their life savings to a Five-Year Trust since this trust would pay the senior all of the interest from their savings for life. Most seniors don’t intend to consume the savings they have accumulated during life; their intent is to pass that money on to the children and simply enjoy the interest off of the money to supplement their retirement income.
Elder law attorneys design Five-Year Trusts so that the trustee can distribute money or assets out of the trust to the children later on if the children need help financially during rough times. This ability to distribute money out of the trust to the children upsets the Colorado Medicaid officials. They see this ability to release money out the “back door” to the kids as a way for money to escape from the trust, then be given back to the senior by the good graces of the children. Even though there is no pre-conceived plan among the family members to do this, the Colorado Medicaid folks presume collusion. Although case law prohibits this presumption, Medicaid thinks that everyone that plans with these trusts plans in advance to defraud Medicaid. This contention is absurd.
Medicaid reviews all trusts of Colorado Medicaid applicants. Medicaid officials routinely deny benefits by finding one reason or another why their Five-Year Trust is ineffective. What they usually come up with is a reason to determine that the assets originally transferred to the trust were never, in fact, given to the trust as a true gift; therefore, Medicaid declares that the assets in the trust are “available resources” which prevent the senior from qualifying for Medicaid benefits on the financial side of the equation.
We and several other Colorado elder law attorneys have challenged Medicaid on these various denials and have prevailed in almost every case. Medicaid, however, continues to invent new ways to declare these trusts ineffective planning techniques.
Although I was intimidated by their constant denials, I have made the decision to continue to use these trusts for my clients and prepare my clients to be ready for a fight later on when Medicaid attempts to declare their trust an available resource. I advise my clients of the risks up front and tell them that they are no worse off, except for the incremental fee for doing this type of planning, than if they had done no planning whatsoever. The Five-Year Trust will still avoid probate and make certain that properties are distributed to the children in a matter that my clients specify. With the other accompanying documents, including financial powers of attorney, healthcare powers of attorney, living wills and HIPAA releases, they still have an outstanding estate plan that will make everything go faster, cheaper and easier in the event of a later disability or death.
So it’s nothing ventured nothing gained. The more we learn about Colorado Medicaid and how the bureaucracy works, we are more comfortable taking them on. Therefore, we are doing more Five-Year Trusts to help our older clients plan for the future by protecting an inheritance for their children and grandchildren.
If you would like to learn more about the Five-Year Trust, call Andrea at my office at (303) 423-8423 to order a free copy of a paper I have written entitled “The Five-Year Trust.” You’ll gain a great insight on how this technique works and whether or not it’s appropriate for you.