Why should divorce be considered a Medicaid-planning tool?
With respect to a married couple, financial protection of the healthy or at-home spouse is always an important concern. In certain rare cases, divorce might be the most practical move (from a purely financial perspective). This is because a divorce court order can supersede the normal “spousal resource allowance” rules prescribed under state Medicaid regulations.
Eligibility for Medicaid is based on the amount of your income and assets. When a spouse enters a nursing home and applies for Medicaid, the couple’s assets must be pooled together and totaled to determine what portion the healthy spouse may keep. After this spousal resource allowance has been determined, the Medicaid applicant must transfer assets representing the amount of the allowance to the healthy spouse. The remaining assets must be spent on the institutionalized partner’s medical care (assuming his or her state allows a spend down).
How can divorce protect resources?
A court order for the payment of income or the transfer of assets from the institutionalized spouse to the healthy spouse can sometimes result in a more favorable financial position for the healthy spouse.
Assume Frank and Liz have assets worth $75,000. Frank recently retired as the vice president of a bowling business and will receive $3,000 per month as retirement income for the next two years only. After that, he will collect an $800 per month pension. Frank suddenly becomes institutionalized, and under the laws of the state where they reside, Liz is entitled to one-half of the family assets ($37,500) as a spousal resource allowance. Additionally, the state allows Liz to receive a monthly income allowance of $1,300, which she may take from Frank’s income.
Unfortunately, after two years pass, Frank’s $37,500 worth of assets has been completely spent on his nursing home bills, and his monthly income has dropped to $800 per month. Therefore, there is no way for Liz to make up the $500 shortfall in her monthly income entitlement.
At the time of Frank’s institutionalization, the couple could have decided to obtain an uncontested divorce. Liz might have been able to convince a judge to give her more than half of the assets (with Frank’s blessing). Additionally, the court may have ordered Frank to pay Liz a substantially larger amount of income each month when Frank was receiving the $3,000.
If institutionalization seems likely and divorce appears to be the best move, the divorce should occur (if possible) before institutionalization. For more information, consult a financial professional or attorney experienced with Medicaid planning.
What are the drawbacks?
First of all, marriage involves more than finances, and the idea of divorcing a beloved spouse of many years is out of the question for many people. The healthy spouse may feel that he or she is deserting the institutionalized spouse. This feeling may be exacerbated by the public nature of the divorce proceedings.
Secondly, there is always the risk that the judge will not order a division of property in accordance with the parties’ agreement. A divorce might be worthwhile only if a judge awards all of the assets to the healthy spouse. Yet, a judge may be reluctant to do that if he feels that an ill spouse with high medical costs deserves more. Furthermore, he may view the parties’ agreement as a sham intended for Medicaid eligibility purposes only and may hesitate to use court authority to circumvent the Medicaid laws.
Finally, of course, there is the issue of incompetence. Obtaining a divorce is much more complicated when a guardian must be appointed for the incompetent spouse. It would be the guardian’s legal duty to act in the best interests of his client only; he or she would not be concerned with the best interests of the healthy spouse. Therefore, it could be difficult for you to obtain your desired financial outcome.
What about prenuptial agreements and second marriages?
With increased frequency, older people are getting married or remarried later in life. In such cases, prenuptial agreements are often used to preserve assets for children. Even when formal prenuptial agreements are not created, the spouses often have informal agreements and arrangements for segregating at least some of their assets.
Unfortunately, all such agreements are ignored for Medicaid-eligibility purposes. The assets of both spouses are pooled together and totaled to determine:
- The spousal resource allowance
- The amount that the institutionalized spouse must spend on his or her own medical care
Assume Rick and Lisa have recently married (it was a second marriage for both of them). Rick has two children from a previous marriage. Lisa has no children and virtually no assets. To protect assets for his children, Rick insisted upon a prenuptial agreement before marrying. In the agreement, assets were disclosed and each party agreed to forgo making claims upon the other’s property.
Two months after the marriage, Lisa suffers a stroke and enters a nursing home at a cost of $6,500 per month. She requires Medicaid assistance. Unfortunately, Medicaid will not begin until after Rick’s assets have been spent down to $117,240 (figure for 2014). The prenuptial agreement is entirely disregarded, and Rick’s plan to protect substantial assets for his children has been destroyed.
It would have been better (from a financial perspective) for Rick to remain single.