Is it Spent Down or Isn’t It?
If I owe someone money but it’s still in my account do I really still own it? Would the answer be different if that “someone” is the IRS?
June called me concerning her dad. “He’s in a nursing home and has spent down his assets,” she said. “I applied for Medicaid but hit a snag. Dad has a whole life insurance policy with $20,000 cash value and the Medicaid caseworker says we have to cash it in.”
I explained to June that cash value counts as an asset. While she is thinking he has no money, he actually has $20,000. I suggested that June take the money and place it in an irrevocable burial trust to pay for Dad’s funeral. She said she had already set that up with other money.
I started to reply but then June interrupted. “Why do we have to cash the policy in? It’s not worth anything because my accountant told me that Dad will owe taxes on the money when he takes it out which will eat up almost the entire amount.
That didn’t sound right to me. She couldn’t tell me exactly what the tax bill would be but said her accountant estimated it. Even if we knew the amount with certainty, however, it still wouldn’t matter. That’s because you can’t simply tell Medicaid the money is owed to someone, even if that someone is the IRS. You actually must pay it. Until that $20,000 is spent down – leaves your account – it isn’t considered spent down.
June had been arguing this point for six months. Medicaid wasn’t conceding the point and so the application dragged on. I told her that Dad’s application is in danger of being denied and if that happens she won’t be able to get her original application date back. That could mean not only spending down the $20,000 but also owing the nursing home for months that she had expected Medicaid to cover, to the tune of $10,000 per month.
What I said hit home. She was clearly drained by the whole Medicaid process which was now in its 7th month. She wanted so badly for it to be over but at the same time didn’t believe that what I was saying “is fair”. I agreed with her but it doesn’t really matter. “If the money is owed to someone then pay it and move on,” I said. June grudgingly agreed.