Royalty income from books, music, or patents can provide a steady stream of revenue, but it can also create complications when qualifying for Medicaid. Medicaid has strict asset and income limits, and royalty payments could push an individual over these limits, affecting eligibility for long-term care benefits. However, with proper planning, it is possible to protect royalty income while still qualifying for Medicaid.
If you or a loved one rely on Medicaid or anticipate needing it in the future, understanding how to structure and protect royalty payments is essential. Contact us by either using the online form or calling us directly at 414-253-8500 for legal assistance.
How Medicaid Treats Royalty Income
Medicaid eligibility is determined based on income and assets. If a person's income exceeds the Medicaid threshold, they may be disqualified from receiving benefits.
Royalty Income as Countable Income
- Medicaid considers royalty payments as unearned income, similar to dividends or rental income.
- If the payments exceed the Medicaid income cap, the applicant may be denied benefits or required to contribute a portion of the income toward care costs.
- Even sporadic or fluctuating royalty payments can cause eligibility issues.
Royalties as a Countable Asset
- If the intellectual property generating royalties is owned outright by the Medicaid applicant, it may be considered a countable asset.
- Copyrights, patents, and trademarks may be evaluated like other financial assets.
- The value of these assets could push a person over the Medicaid asset limit.
Medicaid Lookback Rules and Their Impact on Royalty Income Transfers
| Action Taken | Falls Under Lookback Rule? | Potential Medicaid Penalty? | Alternative Strategy |
|---|---|---|---|
|
Transfer royalties to an irrevocable trust |
✅ Yes (if within 5 years) |
Possible disqualification for a period |
Plan at least 5 years in advance |
|
Sell intellectual property to a family member |
✅ Yes (if below fair market value) |
If not at full market value, Medicaid may impose penalties |
Sell at fair market value with documentation |
|
Gift intellectual property to children |
✅ Yes |
Medicaid will impose penalties based on value |
Transfer assets well before Medicaid is needed |
|
Transfer ownership to a spouse |
❌ No |
No penalty (spousal exemption applies) |
Useful strategy if one spouse is not applying for Medicaid |
Strategies to Protect Royalty Income for Medicaid Eligibility
1. Transferring Intellectual Property to a Trust
One of the most effective ways to protect royalty income is by transferring ownership of the intellectual property into a trust. There are different types of trusts that may be suitable depending on the situation.
Irrevocable Trusts
- Once intellectual property is transferred to an irrevocable trust, it is no longer considered an asset of the Medicaid applicant.
- Royalty payments are directed to the trust and can be distributed according to predetermined terms, keeping the applicant under Medicaid's income limits.
- The applicant cannot revoke or change the trust, which ensures Medicaid compliance.
Medicaid Asset Protection Trust (MAPT)
- A Medicaid Asset Protection Trust (MAPT) is specifically designed to protect assets from Medicaid's reach.
- Intellectual property placed into a MAPT must be transferred at least five years before applying for Medicaid to avoid penalties.
- Income from the royalties can be directed to beneficiaries rather than the Medicaid applicant, preserving eligibility.
2. Gifting or Selling the Intellectual Property
- If Medicaid is needed soon, gifting intellectual property to a family member may seem like a solution, but this can trigger Medicaid's five-year lookback period and cause penalties.
- Selling intellectual property to a family member or an entity at fair market value may be an alternative, but it must be structured carefully to comply with Medicaid rules.
3. Converting Royalty Income to a Non-Countable Form
- Some strategies involve structuring royalty payments into a loan or annuity to convert the income into a non-countable asset.
- Medicaid-compliant annuities allow assets to be turned into a stream of payments that align with Medicaid requirements.
4. Spousal Transfer Strategy
- Medicaid rules allow unlimited transfers between spouses.
- If one spouse is not applying for Medicaid, transferring ownership of the intellectual property to them may protect royalty income.
5. Business Entity Structure
- Establishing a Limited Liability Company (LLC) or Family Limited Partnership (FLP) can help protect intellectual property.
- The entity can own the intellectual property, and income distributions can be structured to minimize Medicaid's impact.
- This method requires careful planning to ensure compliance with Medicaid regulations.
Ensuring Proper Estate Planning for Royalty Income
In addition to Medicaid planning, estate planning is essential for individuals receiving royalty income. Without proper structuring, these valuable intellectual property rights could be mismanaged or lost upon passing.
Creating a Will or Trust for Intellectual Property
- A will allows individuals to specify who inherits their intellectual property and future royalty income.
- A revocable trust can help manage royalty income during one's lifetime and efficiently transfer assets upon death without going through probate.
- A testamentary trust created through a will can direct royalty income to beneficiaries in a controlled manner.
Pour-Over Will and Trusts
- A pour-over will can ensure any intellectual property not placed in a trust during life is transferred to the trust upon death.
- This ensures continuity in managing royalty income and avoids unintended Medicaid consequences.
Protecting Heirs from Medicaid Recovery
- Medicaid has the right to recover costs from an estate after the recipient's death.
- Placing intellectual property in an irrevocable trust or a properly structured LLC can prevent Medicaid estate recovery from seizing royalty income intended for heirs.
Common Pitfalls to Avoid in Medicaid Planning for Royalty Income
Failing to Plan Ahead
- Medicaid's five-year lookback period means that transfers made within five years of applying for benefits may result in penalties.
- Early planning ensures assets are protected before they are scrutinized by Medicaid.
Misusing a Revocable Trust
- While a revocable trust can help with estate planning, it does not protect assets from Medicaid since the grantor retains control.
- Only irrevocable trusts effectively shield intellectual property from Medicaid's reach.
Ignoring State-Specific Medicaid Rules
- Medicaid rules vary by state, and some states have specific exemptions or allowances regarding intellectual property and royalty income.
- Consulting with an experienced Medicaid planning attorney ensures compliance with local regulations.
Contact an Attorney to Protect Your Royalty Income from Medicaid
Proper planning is essential to safeguard royalty income from books, music, or patents while maintaining Medicaid eligibility. Whether you need to set up an irrevocable trust, structure royalty payments strategically, or plan for estate transitions, legal guidance is crucial.
At Heritage Law Office, we assist clients in structuring their intellectual property holdings to protect Medicaid eligibility and preserve generational wealth. Contact us today by using our online form or calling 414-253-8500 for professional legal assistance.
Frequently Asked Questions (FAQs)
1. How does Medicaid count royalty income for eligibility purposes?
Medicaid treats royalty income as unearned income, similar to rental income or dividends. If the royalties exceed Medicaid's income limits, the applicant may be required to use the excess funds to pay for care costs or risk losing eligibility. Additionally, the intellectual property itself may be considered a countable asset, depending on how it is owned and structured.
2. Can I transfer my intellectual property to a trust to protect it from Medicaid?
Yes, transferring intellectual property to an irrevocable trust can help protect royalty income from Medicaid's income and asset limits. However, this must be done at least five years before applying for Medicaid to avoid penalties under the Medicaid lookback period. A Medicaid Asset Protection Trust (MAPT) is a common tool used for this purpose.
3. Will Medicaid try to recover costs from my estate if I receive benefits?
Yes, under Medicaid Estate Recovery, the government may attempt to recover funds from your estate after you pass away. If intellectual property or royalty income is still in your name, it could be subject to recovery. Placing assets in an irrevocable trust or a properly structured business entity can help prevent this.
4. What happens to my royalty income if I need Medicaid immediately?
If Medicaid is needed urgently, strategies like spousal transfers, setting up a Medicaid-compliant annuity, or selling intellectual property at fair market value may help. However, these approaches require careful structuring to comply with Medicaid rules and avoid penalties. Consulting with an attorney is essential in such situations.
5. Can I still receive royalty income while on Medicaid?
Yes, but the income must be structured correctly to stay within Medicaid's income limits. If royalty income is too high, Medicaid may require the applicant to contribute it toward care expenses or may disqualify them. An irrevocable trust or other planning strategies can help manage this income to maintain eligibility.