We recently had a client, Sarah, a widow, who came to us for assistance in applying for Medicaid benefits. It had been a second marriage for both she and her late husband, John, and each of them had children from their previous marriages. Immediately after they were married, John sought the help of an estate planning attorney as he wanted to make sure Sarah was financially taken care of but also wanted to provide his children with an inheritance. To accomplish this his attorney set up a trust with several “interesting” provisions.

John explained to his attorney that his top priority was to make sure Sarah would have a home. When they were married, the house was titled solely in John’s name, where it remained for the duration of their marriage. He asked the attorney if he could title his house in such a way that, upon his death, the ownership of the home would pass to his children, with Sarah being able to remain in the home for her lifetime. The attorney explained he could add language in his trust that would transfer the home to his children when he died, but Sarah would retain a “life estate.” As a “life tenant,” the sale of the home would require Sarah’s consent and she would need to sign the deed transferring her “lifetime ownership” interest. Additionally, she would be entitled to a portion of the sale proceeds depending on her age at the time of the sale.

John also wanted to provide Sarah with monthly income. He owned several rental properties, so he had his estate planning attorney put provisions in his trust that the ownership of his rental properties would pass to his children but Sarah would be entitled to the rental income as long as she continued to pay the maintenance and upkeep on the properties.

Unfortunately, John’s expensive, well thought-out estate plan he had his attorney draft triggered several Medicaid pitfalls which became problematic not only for our client but also for his children. Neither John nor his estate planning attorney took into consideration that his wife may end up needing nursing home care, that the rental property income would not be enough to cover the cost of long-term care, and that she would need to apply for Medicaid.

One of the major issues our office ran into when assisting Sarah in applying for Medicaid benefits is that when a spouse dies and the surviving spouse applies for Medicaid, the surviving spouse is penalized if they don’t receive what the State considers their “spousal elective share”.

For example, in Kansas, the state would require Sarah receive 100% of the home and at least 50% of the assets. Anything less than this amount and the state treats it as though the surviving spouse gifted the money away, which results in transfer penalties and ineligibility. During this penalty period, the applicant is required to privately pay. In Sarah’s case, the transfer of the home and rental properties to John’s children penalized her over 10 months, during which time she would not be eligible for benefits. She was distraught as she did not have enough income to privately pay and no assets to liquidate in order to pay for her care.

It took several months of negotiations with John’s children before they decided they would sell the home and Sarah would then receive the proceeds from her life estate interest to pay while the penalty was running out. Unfortunately, during those months, Sarah’s outstanding bill grew to over $30,000 and once she received the funds from the house sale ($30,000), all of the monies went to the nursing home for back pay.

Medicaid can be tricky enough for a single person or a married couple. When you are dealing with a blended family the complications only multiply. Whether you are just now creating your estate plan, or you currently have an estate plan and are in need of long-term care, you should consult with an experienced elder law attorney to avoid these costly mistakes.

*Names have been changed for privacy purposes