By Kelly B. Neubauer, Esq.
The Need for Planning
One of the greatest fears of older Americans is that they may end up in a nursing home. This not only means the loss of independence, but also a tremendous financial burden. The average nursing home care costs $75,000 per year, and often times, more.
Many people end up paying for nursing home care out of their savings until they run out. The advantages of paying privately are that you are more likely to gain entrance to a better quality facility and doing so eliminates or postpones dealing with your state’s welfare bureaucracy–an often burdensome process. The disadvantage is that it is expensive and often wipes out a lifetime of hard work and savings.
Careful planning, whether in advance or in response to an unanticipated need for care, can help maximize one’s resources and protect one’s estate.
Medicare Part A covers up to 100 days of “skilled nursing” care per spell of illness. However, the definition of “skilled nursing” and the other conditions for obtaining this coverage are quite strict and in reality, few nursing home residents receive the full 100 days of coverage. As a result, Medicare pays for only about 9 percent of nursing home care in the United States.
Unlike Medicare, which is totally federal, Medicaid is a joint federal-state program. Each state operates its own Medicaid system, but this system must conform to federal guidelines in order for the state to receive federal money, which pays for about half the state’s Medicaid costs.
This complicates matters, since the Medicaid eligibility rules are somewhat different from state to state, and they keep changing. (The states also sometimes have their own names for the program, such as “MediCal” in California and “MassHealth” in Massachusetts.) Both the federal government and most state governments seem to be continually tinkering with the eligibility requirements and restrictions. To be certain of your rights, consult an expert. He or she can guide you through the complicated rules of the different programs and help you plan ahead.
Those who plan far enough in advance may have the luxury of distributing or protecting their assets. This way, when they do need long-term care, they will quickly qualify for Medicaid benefits. Giving general rules for so-called “Medicaid planning” is difficult because every client’s case is different. Some have more savings or income than others. Some are married, others are single. Some have family support, others do not. Some own their own homes, some rent. So while I have provided an overview of planning strategies, consulting with an expert about your individual situation is very important.
Transfers a.k.a. Just giving the money away
Transfers should be made carefully, with an understanding of all the consequences. People who make transfers must be careful not to apply for Medicaid before the five-year look back period elapses without first consulting with an elder law attorney. This is because the penalty could ultimately extend even longer than five years, depending on the size of the transfer.
Any transfer strategy must take into account the nursing home resident’s income and all of her expenses, including the cost of the nursing home. Also, be very, very careful before making transfers. Also, bear in mind that if you give money outright to your children, it belongs to them and you should not rely on them to hold the money for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce or lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating. Do not give away your savings unless you are ready for these risks.
While most transfers are penalized with a period of Medicaid ineligibility of up to five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:
- Your spouse (but this may not help you become eligible since the same limit on both spouse’s assets will apply)
- Your child who is blind or permanently disabled.
- Into trust for the sole benefit of anyone under age 65 and permanently disabled. In addition, you may transfer your home to the following individuals (as well as to those listed above):
- Your child who is under age 21.
- Your child who has lived in your home for at least two years prior to your moving to a nursing home and who provided you with care that allowed you to stay at home during that time.
- A sibling who already has an equity interest in the house and who lived there for at least a year before you moved to a nursing home.
Trusts a.k.a. Giving the money away with restrictions
The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may lose them. A safer approach is to put them in an irrevocable trust. Whether trust assets are counted against Medicaid’s resource limits depends on the terms of the trust and who created it.
A “revocable” trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.
An “irrevocable” trust is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust) for life, and the principal cannot be applied to benefit your or your spouse. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home.
You should be aware of the drawbacks to such an arrangement. It is very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose.
One advantage of these trusts is that if they contain property that has increased in value, such as real estate or stock, you (the grantor) can retain a “special testamentary power of appointment” so that the beneficiaries receive the property with a step-up in basis at your death. This will also prevent the need to file a gift tax return upon the funding of the trust.
Remember, funding an irrevocable trust can cause you to be ineligible for Medicaid for the following five years. An irrevocable trust should always be drafted by an experienced elder law attorney.
Protection of the House
After a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient’s care. This is called “estate recovery.”
For many people, setting up a “life estate” is the most simple alternative for protecting the home from estate recovery. A life estate is a form of joint ownership of property between two or more people. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. As with a transfer to a trust, the deed into a life estate can trigger a Medicaid ineligibility period of up to five years.
Another method of protecting the home from estate recovery is to transfer it to an irrevocable trust. Trusts provide more flexibility than life estates but are somewhat more complicated. Once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust.
Applicants for Medicaid and their spouses may protect savings by spending them on noncountable assets. These expenditures may include:
- prepaying funeral expenses,
- paying off a mortgage,
- making repairs to a home,
- replacing an old automobile,
- updating home furnishings,
- paying for more care at home
- paying attorney’s fees
In the case of married couples, it is often important that any spend-down steps be taken only after the unhealthy spouse moves to a nursing home if this would affect the community spouse’s resource allowance.
Immediate Annuities – Making Assets into Income
Immediate annuities can be ideal planning tools for spouses of nursing home residents. For single individuals, they are usually less useful. An immediate annuity is a contract with an insurance company under which the consumer pays a lump sum to the company and the company sends a monthly check for the rest of his or her life. In most states the purchase of an annuity is not considered to be a transfer for Medicaid purposes, but is instead the purchase of an investment. It transforms a countable assets into a non-countable income stream. As long as the income is in the name of the community spouse, it’s not a problem.
In order for the annuity purchase not to be considered a transfer, it must meet three basic requirements: (1) It must be irrevocable (2) You must receive back at least what you paid into the annuity during your actuarial life expectancy. For example, if you have an actuarial life expectancy of 10 years, and you pay $60,000 for an annuity, you must receive annuity payments of at least $500 a month ($500 x 12 x 10 = $60,000). (3) If you purchase an annuity with a term certain, it must be shorter than your actuarial life expectancy. (4) the state must be named the remainder beneficiary up to the amount of Medicaid paid on the annuitant’s behalf.
The Attorney’s Role
Do you need an attorney for even “simple” Medicaid planning? This depends on your situation, but in most cases, the prudent answer would be “yes.” The social worker at your mother’s nursing home assigned to assist in preparing a Medicaid application for your mother knows a lot about the program, but maybe not the particular rule that applies in your case or the newest changes in the law. In addition, by the time you’re applying for Medicaid, you may have missed out on significant planning opportunities.
The best bet is to consult with a qualified professional who can advise you on the entire situation. At the very least, the price of the consultation should purchase some peace of mind. And what you learn can mean significant financial savings or better care for you or your loved one. As described above, this may involve the use of trusts, transfers of assets, purchase of annuities or increased income and resource allowances for the healthy spouse.
If you are going to consult with a qualified professional, the sooner the better. If you wait, it may be too late to take some steps available to preserve your assets