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529s and Medicaid

Get answers about 529 assets and Medicaid qualification, plus putting 529s in revocable trusts.

Susan T. Bart, 04/26/2013

I work with an older gentleman who would like to establish 529 accounts to fund college for his grandchildren and to remove assets from his estate both for estate tax purposes and for purposes of qualifying for Medicaid in the future if he goes into a nursing home. While his assets do not exceed the current federal exclusion of $5,250,000, they do exceed the state estate tax exclusion in his state of residence, which is only $1,000,000. If he is the account owner, will the assets in the 529 accounts count for purposes of Medicaid qualification? Would it be better for him to establish a trust to own the 529 accounts?

Each state administers Medicaid with its own rules. To qualify for Medicaid, the applicant must meet certain qualifications. Generally, the applicant must be over 65, blind, disabled, or the parent of a minor child, and must meet the financial need tests. When a person applies for Medicaid, the state values the applicant's "resources" to determine if they are less than the state's threshold amount, which may be as low as $2,000 or $3,000. Certain assets, such as a homestead or a car, are considered exempt. The federal regulations define "resources" as "cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for support or maintenance" (20 Code of Federal Regulations § 416.120, § 416.1201). The federal regulations further explain:

(1) If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).

20 CFR § 416.1201(a)(1).

Because the account owner could withdraw the section 529 account assets and use the proceeds for support or maintenance, section 529 savings account assets should be counted as a resource. Each state, however, will reach its own conclusion on whether to count section 529 savings account assets, but the overwhelming trend is to count them as resources.

If your client funded 529 accounts that were owned by another individual or by a trust, there is essentially a five-year waiting period before those assets would be disregarded for Medicaid eligibility purposes, because transfers made by the applicant within the last 60 months are subject to a "look back rule."

If an applicant for Medicaid is determined to have assets in excess of the threshold amount because of transfers within the look-back period, then the applicant is disqualified for a period determined by dividing the value of the transferred assets by the average monthly private-pay rate for nursing facility care in the state. This penalty period can be longer than the look-back period.

Thus a potential applicant should generally wait until the expiration of the look-back period before applying for Medicaid. Your client might, for example, make gifts to 529 accounts owned by someone else, but retain sufficient assets to provide for his own support, including, at a minimum, nursing home costs for five years.

Susan T. Bart is a partner in the Private Clients, Trusts & Estates Group at Sidley Austin LLP in its Chicago office, where her practice includes estate planning, estate and trust administration, and fiduciary counsel. She has written two books, including Education Planning and Gifts to Minors published by Illinois Institute for Continuing Legal Education (iicle.com), which extensively discusses 529 plans.

She is the author of Education Planning and Gifts to Minors 2004 Edition. She is a frequent speaker on trust and estate topics in general and Section 529 college savings plans in particular.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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