| Life Insurance and Medicaid are topics we have not talked about yet. I am glad one of my readers brought it up. Keep the questions coming!
CLIENT QUESTION #1
My husband and I set up an irrevocable trust in which we put our home. Both of us have life insurance policies that have a significant cash value. When one of my relative’s mom went into a nursing home, she was forced to cash in her mom‘s life insurance policies, and the proceeds went to either the home or Medicaid. So, we were going to put all our policies in the trust. Is this a good idea?
MY RESPONSE #1
To be eligible for Medicaid you can not have assets exceeding $30,182 (unless an asset is exempt). Insurance policies are NOT exempt. Unfortunately, the cash value of your policy is like any other bank account, and thus it is a countable asset for Medicaid purposes. As such, you should consider transferring the ownership of your policy out of your name to protect it. Transferring the ownership of the policy to your trust is a possible option, but if your trust has been in existence for a while I would not recommend it because it would taint the trust with a new five-year look-back problem.
Note, the death benefit of a policy is not an issue.
CLIENT QUESTION #2
However, I heard that if one of us went into a home the other spouse could transfer the life insurance policy to his or her name prior to the move, is that correct?
MY RESPONSE #2
YES. This is correct. ALL assets can be transferred to the spouse (penalty free) and can subsequently be protected using the concept of spousal refusal. The cash value of the policy is not an exception. Again, it is like any other bank account.
CLIENT QUESTION #3
Is it better to put the trust as a contingent beneficiary if your spouse will need the death benefit to pay property taxes, etc. after your death?
MY RESPONSE #3
We would usually recommend that the spouse keep the insurance in their name, naming themselves as beneficiary…IF THEY NEED THE MONEY TO PAY THEIR BILLS. However, depending on their circumstances, other ideas involving the trust can be explored. Remember, if the spouse is the beneficiary, they will have more money that Medicaid can go after if the spouse needs Medicaid themselves someday.
CLIENT QUESTION #4
Also, what are the tax implications when a person dies, if their insurance policy is in the trust?
MY RESPONSE #4
NONE! Whether a trust is a beneficiary or not, there is no income tax upon the receipt of life insurance proceeds.
I hope this helps!
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