In order to qualify for MassHealth, many Massachusetts residents must transfer assets to a spouse or other relative, or put them in trust. This takes careful planning. If some of these assets are held in tax-deferred accounts, a large transfer of this kind can trigger a huge tax bill.
In this blog post, we will discuss this problem and suggest a way to avoid it.
The basics
In Massachusetts, the federal Medicaid program is rolled into a state program called MassHealth. This program can provide a wide range of medical services. Unlike Medicare, it can pay for long-term care, which is increasingly expensive and increasingly necessary as the population ages.
As with the federal program, MassHealth uses a means test to determine eligibility. If an applicant has over a specified amount in income or assets, they will be ineligible for MassHealth, and, therefore, may have to bear the costs of their long-term care. This can rapidly deplete their assets, leaving them with little to pass on to loved ones.
Transferring assets
One way to pass the means test is by transferring assets. For instance, a person who wants to be eligible for MassHealth may in some cases become eligible after they transfer their personal assets to their spouse or another relative.
However, a large withdrawal or transfer can often mean a hefty tax penalty, particularly when it involves a tax-deferred account. These big tax bills come at a terrible time for the MassHealth applicant and their families, as they are beginning the process of starting long-term care.
One way to get around this problem is by making smaller transfers over a long period of time.
Of course, if you’re going to do this, you will need to start the process long before you or your loved ones need long-term care. This is why MassHealth planning is a long-term, ongoing process.