Probably one of the biggest areas of resistance and interference my clients experience in Medicaid Planning comes from financial professionals. When assets are to be transferred into an irrevocable trust to “start the five-year clock” for Medicaid as part of the Care Assistance Game Plan, whether it is the person needing care or in planning for the spouse potentially needing care, it is critical that the assets not be subjected to any risk of loss during this five year period. Unfortunately, most financial professionals do not truly understand the vulnerabilities of Medicaid Planning, and they instead revert to the investment training they have gone through that prioritizes potential growth and returns over safety during the five-year lookback period.

Here are some of the things we hear:

  • “Stocks always do better in the long run”;
  • “I know how your parents like to have their money invested because I’ve been doing it for years”; and
  • “It’s OK, we can invest conservatively.”

Unfortunately, by the time we’re doing Medicaid Planning it is a whole new world. Most of the family situations we work with involve the five-year lookback period, whether it is for an individual or as part of an overall family plan to qualify one spouse for Medicaid and then begin the five-year clock for the spouse. Because of this, all protected money has to be safe, liquid, and insured in case we need to transition to a better plan if health declines. Here is an example from my soon to be updated book The Long Term Care Solution.


The Nightmare Scenario

Mom transfers $500,000 into the Irrevocable Family Trust to start the five-year clock. Mom also has a house worth $500,000, but her and her deceased husband purchased the house decades ago for about $100,000, so selling it would incur a lot of capital gains taxes. So instead Mom moves the house into the Irrevocable Property Trust, planning to keep it in the trust until she passes on and the capital gains would get “washed away” and the kids could sell the house after death without the taxes.

Son has a stockbroker who invests mom’s money within the trust the same way he invests son’s money. Then we get a 2008-style crash less than a year into the five-year lookback period, and broker loses half of mom’s money in the market, leaving the Irrevocable Family Trust with only $250,000. And now mom’s dementia declines dramatically, and suddenly her care is costing $100,000 a year above and beyond her income. So that’s only two and a half year’s worth of care left with four years left on the five-year clock.

But here’s the worst part: Medicaid only sees that $500,000 went into the irrevocable trust as the “gift.” After that, they don’t care that $250,000 was lost in the market. So any transfer penalty would be calculated at $500,000 and not at the $250,000 left over from the market crash. And suddenly mom’s stuck without enough money for her care. So what do we do?

Time to sell the house!

OK, now the house gets sold, but because the economy crashed, it can only get $300,000 in the depressed market. Assuming mom had enough capital gains tax credits to cover the gain on the sale of the house, she adds the $300,000 to the $250,000 left in the Irrevocable Family Trust, and now son can pay for mom’s care over the next four years, leaving $150,000 in the trust before Medicaid takes over.

Had the money simply been invested in something safe, liquid, and insured, son could have spent the Irrevocable Family Trust down to $100,000 and still had the $500,000 house for the family. By risking money to make money, son managed to turn a $600,000 inheritance for him and his siblings into $150,000. I’m sure his siblings aren’t all that happy with him at the moment.

Let’s take this scenario one step further. What if there was no house? Now we’re talking about Mom not having enough money to pay for her care. Are her kids going to come up with the extra $150,000 to get Mom past the five-year clock before Medicaid takes over?”


Even if the broker invests “conservatively” and loses only 30% instead of 50%, the family is now left with a lot less or even struggling to pay for Mom’s care themselves just because their advisor wanted to try to make a little more money rather than have the money out of their control but now safe, liquid, and insured.

So why would brokers and advisors try to do this?

Usually its just a simple matter of them not understanding the full consequences of losing money in the market. It’s no longer just that the family loses money and then has to keep invested to make it back. It’s that the family may have lost money and they now have to figure out how to cover a $7,000-$12,000 nursing home bill every month with money that is no longer there. When market losses are combined with the monthly cost of long term care to get past the five-year threshold, it can financially devastate the family far beyond what was lost in the market. In other cases, the broker or advisor simply doesn’t want to lose the money they have been making in commissions and fees. Unfortunately, we see far too much of that.

When it comes to investing during the Medicaid lookback period, it is no longer a matter of deciding where you can make the most money. This is because guaranteed stable or increasing assets is critical to the entire plan. When it comes to investing during the five-year lookback period, the keys are to make sure it is safe, liquid, and insured as part of the overall Care Assistance Game Plan.