A Funeral Plan is Not Always the Best Medicaid “Spend-Down” Solution

Across the nation, about half of all seniors who require nursing home care depend on Medicaid to cover the cost of that care. Medicaid, however, has both income and asset tests that must be satisfied before a senior will be approved for benefits. If the applicant’s assets exceed the limit, the applicant will be told to “spend-down” the excess assets in order to reach the asset limit (typically $2,000 for an individual). One “helpful” piece of advice often given to seniors in this situation is to purchase a funeral plan as a way to spend-down assets. After all, if you don’t already have a plan you will use it eventually and funeral plans are considered exempt assets, right? Not always.

The Need to Spend-Down

With the average national monthly cost over $6,000, many seniors cannot afford to cover the cost of nursing home care out of pocket. Basic healthcare insurance policies do not cover long-term care. Medicare won’t help either as it only covers long-term care expenses under very limited circumstances and only for a very short period of time. For many seniors, that leaves Medicaid as the only viable option to help with nursing home expenses. The problem is that Medicaid is a “needs based” program, meaning there are income and asset limits that cannot be exceeded by program participants. In most states, an individual cannot have “countable resources,” or non-exempt assets, valued at more than $2,000 while couples have a limit of $3,000. If the applicant’s non-exempt assets exceed the limit the applicant will be told to “spend-down” those assets. Spending-down assets may mean paying for nursing home care out of pocket until the excess assets are depleted, but it can also include turning non-exempt assets into exempt assets. That is the idea behind purchasing a funeral plan because funeral plans can be considered exempt assets for purposes of determining Medicaid eligibility; however, it is not a blanket exemption.

Exempt vs. Non-Exempt Assets

When determining Medicaid eligibility, the value of an applicant’s non-exempt assets are taken into account. However, exempt assets are not counted when determining eligibility. Examples of typical exempt assets include:

  • Primary residence (up to $500,000 ($750,000 in some states) net equity and adjusted for inflation)
  • Household furnishings
  • Household goods
  • A vehicle
  • Personal effects and keepsakes
  • One car
  • Life insurance – term insurance has no limit; however, insurance with a cash value has a $1,500 face value limit
  • Certain income-producing property may be exempted
  • Burial plot(s)
  • Headstone and casket

Funeral Plans – Exempt or Non-Exempt?

Well-meaning friends, family members, or nursing home staff may suggest purchasing a funeral plan if a Medicaid applicant needs to spend-down assets. Moreover, that advice often includes purchasing more services than will likely be needed in order to spend-down more assets. This advice is based on the belief that the value of services not used from a funeral plan will be refunded to the decedent’s estate, making it a “win-win” proposition. So what is wrong with this advice?
For a funeral and/or burial plan to be exempt it must be irrevocable. In other words, once the plan is purchased the funds cannot be refunded for any reason. Assuming the plan is irrevocable, at least part of the plan may indeed be exempt, but not necessarily all of it. This is where is can become complicated for the average applicant to follow. In some states, a funeral and burial plan is exempt, but if the value of the plan exceeds $1,500 then the value of any cash value life insurance will not be exempt. In other states, an irrevocable funeral plan is exempt, however, there is a limit on the value of goods and services within the plan that can be exempted. All states exempt burial plots, but some states include all members of the applicant’s household while others exempt burial plots for the applicant’s immediate family. Finally, there is nothing to be gained by purchasing excess funeral and burial services because while it is true that the funeral home may refund any unused funds, the Medicaid Estate Recovery program has a right to claim those funds.
Purchasing a funeral and burial plan may be a wise estate planning decision and could be a benefit for a Medicaid applicant who needs to spend-down assets; however, it is imperative for an applicant to understand that funeral and burial plans do not enjoy a blanket exemption.

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