(Dow Jones) Transferring assets to your children in order to qualify for government benefits is a fairly standard practice these days, but the move can cause problems if it's not done properly.

A retired couple in their early 80s nearly found this out the hard way. Luckily for them, their daughter was paying attention at a financial planning workshop. She got the adviser running the workshop, Mark Lloyd, involved in her parents' case.

Mark Lloyd is president of The Lloyd Group, Inc., a Suwanee, Georgia-based firm that offers retirement and estate planning services. The workshop covered strategies for protecting family assets from nursing expenses, including long-term care insurance. After it, the daughter explained to Lloyd that insurance wasn't an option for her parents. "You need to be healthy to get long-term care insurance, but both mom and dad had health problems," recalls Lloyd.

The family had moved the father into assisted living. He loved it--plenty of social events, great food. His health even improved. But there was a problem: The couple's monthly income was just $2,500 per month, including $1,600 from Social Security and $900 from a pension. The facility cost $4,500.

The $2,000 extra a month in costs was quickly eroding the couple's $250,000 nest egg, even without taking into account the mother's living expenses. The family didn't know how long the savings would last at the current pace, much less if the father's health declined and they had to pay $7,000 a month for a nursing home.

Talk turned to shifting the parents' assets--the nest egg and the $250,000 home the parents owned free and clear--into the children's names so the parents could qualify for Medicaid. This was a bad plan, says Lloyd.

"They didn't realize that deeding the home to the kids would trigger capital gains tax," he says. "And when evaluating eligibility for Medicaid the government can look back five years to see if any gifts were made. Say Dad had a stroke within the next five years and they tried to get him on Medicaid. The gift would be penalized."

Lloyd sat down with the daughter and started asking questions. First up: Was her father a veteran? There's a little-known benefits program administered through the VA for veterans who served during wartime. To qualify, vets need at least 90 days of active duty but only one day has to have come during actual wartime (other eligibility requirements apply as well).

It turned out the father's service during World War II qualified him for a benefit. Lloyd's firm has a partnership with the Veteran's Assistance Program and provides services related to VA benefits free of charge. So after a little digging, Lloyd figured out that the father could qualify for $1,949 a month. It was a near-perfect amount to plug the $2,000 monthly cash-flow hole.

There was a hitch, though: The $250,000 nest egg made him ineligible. Lloyd suggested setting up an irrevocable trust with the daughter as trustee. This strategy allowed the father to receive his VA benefit, provided income to the couple and prevented the assets from being dispersed among the children. Meanwhile, the five-year Medicaid clock started ticking.

"So many families just want to get the assets out of Mom and Dad's name, so they sign everything over and hope everything will be OK," says Lloyd. "But five years is a long time. If something happens--say a child loses their job and has to dip into the assets to make ends meet--then things start getting messy. Part of the money could get lost. With this move we could provide the cash flow needed for the assisted living facility and the mother's living expenses, protect the nest egg and prepare for any future long-term care costs."

Copyright (c) 2010, Dow Jones. For more information about Dow Jones' services for advisors, please click here.