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Tax Fraud or Medicaid Penalty? Part 2

Last week we were discussing Joe’s problem.  His brother Jim had been using Dad’s account to buy and sell Jim’s investments, presumably because having Dad pay the tax instead of Jim was more beneficial.  However, what happens when Dad applies for Medicaid?

Medicaid will definitely question the $500,000 in assets transferred back from Dad to Jim.  As long as Jim can show that he originally transferred the assets to Dad, then the transfer back is simply Jim taking his money back.  Joe, however, told me of Jim’s reluctance to cooperate, for obvious reasons.

I explained that while I cannot guarantee that the IRS or State Division of Taxation won’t catch on, it is highly unlikely.  I don’t know of any instance in which Medicaid has reported what it sees on a Medicaid application to the IRS or New Jersey’s income  tax division.  Government bureaucracies don’t communicate well with each other.  And certainly there is even less communication between federal and state government.  So, I think it is very unlikely that Jim will run into problems because of what is disclosed as part of a Medicaid application.

Still, that may not be enough to secure Jim’s cooperation.  But, I told Joe that his calling me now, while Dad still has significant assets, was a good thing.  Knowing the potential problems that lie ahead,  we can work around them.

Joe told me that Dad receives $2250 from Social Security and a pension and that he is a Korean War Veteran.  That’s good.  Moving Dad’s assets into a VA qualifying trust, we can get him a VA Aid and Attendance pension  of  $1753 per month if he moves to an assisted living facility.  At $4000 per month his income would entirely cover the $4000 monthly cost of care that Joe had estimated.

It is very likely, however, that as Dad’s health declines he’ll need increased care so that $4000 number will climb.  Our goal is to stretch his dollars so that he does not need Medicaid until 5 years after Jim took his $500,000 back.  Why?  Because then we won’t have to explain it all to Medicaid since it will fall outside the 5 year lookback.

Doing the math, I showed Joe how that was very doable.  Jim took back his money 6 months ago.  So we really have to get through the next 4 and ½ years, 54 months.  If over that 54 month period Dad’s care averages $6000 per month, he’ll need an additional $2000 above what his income can cover.   That money would come from the money we transferred to the trust, approximately $108,000 in total.  Once we’re past the 5 years we don’t have to worry about the mess Jim created.

But what if Dad’s health deteriorates more rapidly and he needs nursing home care at $10,000 per month after, say, 6 months.  Well, that means the shortfall over 4.5 years would be about $300,000 and Dad would have just enough to get through till Medicaid kicks in.

I explained to Joe that these were all estimates but the point I was making, which he clearly understood, is that we need to manage Dad’s care and costs with an eye towards Medicaid down the road.  Of course, we don’t know what scenario will actually occur, but following my plan he’ll be ready for whatever the future throws at him.  And we won’t have to worry about getting Jim to cooperate to fix the mess he created.