Question: We have followed your column for years, and have been tempted to write many times in the past, but now our dander is really up. My husband and I are what you might call “middle class,” if there really is such a thing any more. I am a retired schoolteacher. He was scheduled to retire next year, but we have just found out that we can’t afford it because his company is one of those with an underfunded pension plan, meaning that he has worked for more than 30 years with the promise of a pension, but if we receive fifty cents on the dollar, we will be lucky.

This has turned our “retirement planning” on its ear. It will be three more years until we can draw Social Security, and we’re told that if we work to try to earn more, up to 85% of our Social Security will be taxed. The paltry amount we saved with the so-called “income tax cut” has more than been eaten up by the increased costs of health care, property taxes, and gasoline.

We both have had experience with parents in nursing homes: My mother spent every last penny during her first three years and qualified for Medicaid for the last two years because my sister insisted “Medicaid planning” was wrong. My husband’s father and mother sold everything they owned to pay for their care and died paupers, upset that they were not able to pass anything down to their children.

We are concerned about what will happen to us if we outlive our money because the government has allowed my husband’s employer to get away with stealing his pension, but more concerned about what will happen if one of us needs nursing home care. We can’t afford long-term care insurance, and feel we must begin planning to protect ourselves, but all we hear is that too many “rich seniors” are giving away their assets to be able to qualify for Medicaid. My husband and I, and many more like us, are being taken advantage of by the system, and we feel helpless. We are not asking for any specific answer, and you may feel free to print this, but not our names, please.

Answer: The categorization of middle-class families like yours as “rich crooks” for taking advantage of planning opportunities to protect yourselves and to pass on some assets to your children is, at best, disingenuous, given the fact that the same “system” now allows the wealthiest two percent of Americans to shield billions of dollars each year for their offspring.

For example, in a 2003-2004 IRS study of gift tax returns for the year 1997, more than 218,000 Americans reported more than $31 billion in wealth transfers by gift for that year alone -- more than three times the proposed $10 billion axing presently scheduled for the Medicaid budget. And, in 2003, 91,679 estates filed returns that generated more than $20 billion in estate taxes -- twice the amount of proposed Medicaid cuts. Yet there are moves afoot to repeal estate taxes that only affect people who die this year with more than $1.5 million.

At the same time, according to statistics for 2002, an estimated $93 billion in Social Security benefits were subject to taxation and, assuming an average tax rate of 20%, more than $18 billion income taxes were collected from seniors and disabled individuals who receive Social Security benefits.

Taking The NextStep: Is there something wrong with this picture? We think so! The 97 percent of Americans who are not wealthy enough to file estate tax returns are being castigated for making gifts to qualify for Medicaid, while the other three percent who are wealthy enough are encouraged to make gifts to avoid estate taxes, and make themselves tens of billions of dollars each year in the process. In fact, a Google search for “Medicaid Planning” returns 2,296,000 sources, while “Estate Planning” returns 29,100,000 sources.

But how much does “Medicaid planning” really cost the system? Not much, according to a May 2005 study by the Georgetown University Long-Term Care Financing Project. Based on that study, the true facts don’t support the claims of misdirection-minded budget cutters at both the federal and state levels who are trying to do away with planning opportunities for middle-class Americans, yet widen them for the wealthy.

After reading the study, we spoke with its author, Ellen O’Brien. Based on the study, audits of Medicaid applications show that only a small fraction of those who apply actually transferred assets to achieve qualification. The study also finds, in direct contradiction of claims by political leaders and lobbyists, that there is "little evidence that large numbers of the elderly are planning their estates for the purpose of gaining easy access to Medicaid in the event they need nursing home care."


Here is a link to a good study by the Minnesota House of Representatives that studies states that tax social security benefits. Link

Here is a link to a Social Security Fact Sheet Link

Here is a link to an IRS study of life time transfers since 1997 Link

This links to a pdf document from Georgetown University. Be sure to click on useful links above to see other studies they have conducted on asset transfers for medicaid qualifications. Link