Long-term care can decimate an estate unless you protect yourself ahead of time.
Many people are crossing their fingers that they won’t need long-term care (LTC) when they get older. But “someone turning age 65 today has almost a 70 percent chance of needing some type of long-term care services and supports in their remaining years,” according to the U.S. Department of Health and Human Services.
And that care doesn’t come cheap. The cost of a private room in a nursing care facility averages $7,698 per month, or more than $92,000 per year. That amount is “ruinously expensive,” according to the New York State Court of Appeals. Yet few people are aware they have options and rights when it comes to LTC planning and Medicaid.
Medicaid is Payer of Last Resort
Medicare does not cover LTC. Payment for LTC must come from your own pocket, long-term care insurance (if you’ve purchased a policy, kept current on payments and qualify under the policy’s terms) and Medicaid.
Medicaid coverage of nursing home costs is means-tested. Often, by the time people qualify for Medicaid, their assets are depleted. Any inheritance they hoped to leave loved ones is gone, and they are without financial security if they end up moving out of the care facility.
As an example, New York has a relatively generous income allowance for Medicaid. Those 65 and older may have no more than $15,150 in assets (some other states put this limit at $2,000 or less). Income may also factor in. The annual income limit in New York for an older adult is $10,100.
There’s an important catch regarding assets. Medicaid has a look-back provision which lets the government review transfers of assets for up to five years before the Medicaid application. If it finds a transfer that was not exempt, the applicant may become ineligible for Medicaid for a defined penalty period.
Asset Protection Trusts
To qualify for Medicaid, you may place assets, such as your home, in an irrevocable trust. These assets legally no longer belong to you, but are controlled by an independent trustee. You can designate a spouse or other loved ones to inherit the assets of the trust upon your death. While you lose control of the trust’s principal, you can use assets in the trust during your lifetime.
This method of asset transferal has benefits compared to simply giving the assets away with strings attached, such as specific conditions. For starters, you don’t have to rely on an individual’s trustworthiness (such as hoping that person won’t turn around and kick you out of the home). You won’t be left in the cold by having your home taken away if an individual incurs a debt or liability that exposes that person’s assets to debt collection. There won’t be complications over who owns the house or whether or not you can stay in it because an individual got divorced or predeceased you. And the individuals will receive a step-up in basis for assets like a house when it is placed in a trust, meaning they won’t have to pay capital gains on the difference between what you paid for it and what it is worth when you die.
Also, if your home in such a trust is sold while you’re still alive, the proceeds will not count toward your Medicaid eligibility. Be aware that a revocable, or “living” trust, does not offer this protection. Assets in a revocable trust are still considered to be your property.
Further, irrevocable trusts are subject to the five-year Medicaid look-back period.
Finding a Medicaid FacilityMedicaid traditionally pays only for nursing home care, not assisted living, unless a state has a waiver for that option. At any rate, your biggest hurdle may not be asset protection but finding a facility with openings that also accepts Medicaid. Facilities that pass inspection may choose to designate a small percentage of beds for Medicaid patients. Other facilities may elect to take only private payers.
Many facilities are requiring a period of private pay, typically from 18 months to four years, before accepting Medicaid payments from residents. Thus, residents must have enough assets to be able to make it through this spend-down period before they can rely on Medicaid to cover their LTC costs.
The Medicaid contract typically offers payment that is considerably lower than (sometimes less than half) the private pay rate. Thus, nursing homes are disincentivized to accept Medicaid residents. It’s not uncommon for families to place dozens of calls in an attempt to find a care provider for their loved one.
The Medicare site has a feature that can tell you if a nursing home accepts Medicaid.
When you apply for Medicaid, an income limit is enforced. If your income exceeds this amount, the excess has to be managed appropriately in order for you to get and keep Medicaid eligibility.
Qualified Income Trusts (QITs), also referred to as Miller Trusts, are useful in states where an income cap does not allow spend down on your own care to comply with Medicaid limits. QITs are irrevocable trusts designed to hold excess income with disbursements managed by a trustee.
Period Income Trusts (PITs) are similar to QITs, but for disabled individuals whose surplus income is pooled and managed by a nonprofit. The nonprofit organization functions as the trustee. PITs are not for estate planning. Funds that aren’t used will stay with the trust for charitable use.
Private Annuities and Promissory Notes
Many times, older adults unexpectedly require long-term care when they have either transferred assets within the look-back period or still hold meaningful assets. Divesting these assets within the look-back period automatically triggers a penalty. The penalty time period is the number of months someone is ineligible for Medicaid. The penalty is calculated by dividing the value of assets by Medicaid’s regional monthly rate for nursing home care.
A 2006 law allows you to preserve some assets while still qualifying for Medicaid by using a private annuity or promissory note to pay the nursing home over a shorter penalty period. It’s a bit confusing, so an example will help demonstrate how it works.
Jane has a bank balance of $300,000 when she suddenly needs nursing home care. She’d like to pass some of those assets on to her daughter, Susan, but she doesn’t think she can because she is way past the look-back period. She figures all she can do is spend down her assets before applying for Medicaid to cover her care.
Jane is correct in thinking that if she gives the $300,000 to Susan, she will be penalized by Medicaid. If the average cost of a nursing home room in her area is $5,000 a month, then that would make Jane ineligible for the full five year look-back period. All of her assets would be spent on her care, and none would go to Susan.
However, if Jane gives Susan $150,000, the penalty period changes to 30 months. With her remaining $150,000, Jane can buy a private annuity or promissory note that will provide a monthly income of $5,000. She can use this income, combined with her Social Security check, to pay for nursing home care during the shortened penalty period. When 30 months have passed, she’ll be in the nursing home with Medicaid coverage and Susan will be able to keep $150,000.
It may not be as good as what could be achieved if Jane had planned ahead, but it’s a great strategy to pass along some assets in a pinch.
This strategy can work well in a situation where you want or need extra services above and beyond what a nursing home provides and Medicaid covers. A family member or friend can get income this way, and you can get care from someone you know and trust. Payment for these services removes that amount from your countable resources.
To pay a caregiver in advance, you must have a pre-determined agreement in place that adheres to specific rules.
- The agreement defines the services that the caregiver will provide and the hours she or he will work.
- You have figured the payment using a reasonable life expectancy and valid market rate for services.
- The caregiver has to keep a daily log of services provided and hours worked, as well as written invoices.
- When the patient dies, the caregiver must pay back unearned funds to Medicaid in an amount up to that which Medicaid paid for the patient’s care.
Spousal Transfers and Refusals
Between spouses, Medicaid allows transfers that are not subject to a look-back period or any penalty. Thus, a classic strategy is to place assets that are in the name of the spouse who needs care into the name of the well spouse.
Some states allow spousal refusal. In this case, the well spouse refuses to provide financial support for the spouse who needs care, enabling that spouse to qualify for Medicaid. However, when Medicaid begins providing services it will pursue contributions from the well spouse. Sometimes, Medicaid does not seek its rights, and in others, it will settle at a discount. Reimbursement to Medicaid will always be lower than paying the inflated private pay rate that would have been charged.
Elder Law Attorney Critical
The final step is to contact an elder law attorney who specializes in Medicaid. While it is important to familiarize yourself with various strategies for asset protection, only a specialist can ensure your plan is the best available option for your situation.
To complicate matters, each state has its own system for Medicaid services with unique rules that you must adhere to. It’s critical that a qualified elder law attorney draw up documents that comply with state and federal laws to ensure asset protection.
A good attorney can also prevent a relative with the best of intentions from gifting a Medicaid recipient money that could result in disqualification from the program.
Also, Medicaid rules change often. An elder law attorney will be aware of recent modifications and can keep you informed of future changes that may affect your plans.
Click below for the other articles in the May 2019 Senior Spirit
Blog posting provided by Society of Certified Senior Advisors
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