How the Medicaid System Differs From the Criminal System
“Mom and Dad have always been big believers in paying cash for everything. They don’t use credit cards”, John tells me. “Don’t buy on credit”, they always said. While that’s a pretty sound financial approach, it can get Mom and Dad into hot water when it comes time to apply for Medicaid. That’s because the Medicaid system works very differently than the criminal system. Let me explain.
First of all, you need to understand some basics about how Medicaid works. In order to qualify, one must spend down assets first. When essentially all your money is gone, (in the case of a married couple the healthy spouse gets to keep a small amount) then Medicaid will kick in. However, if you have made transfers for less than fair value, what most people would call gifts, then you won’t be eligible for Medicaid. The greater those transfers the longer your ineligibility period.
And before the government will step in and pay for your care it will insist that you show it how you spent your money. And by “show”, I mean on paper, by producing each and every financial statement dating back what will soon be 5 years from the date you apply for benefits. So, this is where my reference to the criminal system comes in. Everyone knows from grade school the concept of “innocent until proven guilty”. With Medicaid, however, that concept is turned around. You are “guilty” until proven “innocent” when it comes to transfers for less than fair value. By that, I mean to say, that if you can’t prove what you have spent your money on, then Medicaid will consider it a transfer for less than fair value, a “gift” in essence, causing a denial of benefits.
Let’s then, go back to John’s parents. As we know, cash is hard to trace. Think about it. If Mom and Dad have been withdrawing cash for their spending needs how hard is it going to be to prove, going back as many as 5 years, what they spent that money on. All we’ll see on their bank statements are cash withdrawals. No explanations. Who keeps all those receipts? Hardly anyone. But that’s what Mom and Dad need to do in order to preserve their eligibility for government benefits.
So how do they avoid this potentially catastrophic result? They need to better prepare themselves for the possibility of needing long term care, well before they need it time and consult with a knowledgeable elder law attorney who can tell them how to spend down their assets and establish a clear paper trail, while preserving their ability to qualify for government benefits.