What’s your worst financial nightmare? For many elderly people and their families, it’s seeing a lifetime’s worth of savings evaporate in a short period of time if one spouse, or both, is forced to move to a nursing home or some other facility. It’s not unheard of to spend up to $100,000 a year or more for the care of a person who needs assistance with regular daily activities. Even if you’re financially secure, that can drain bank accounts in a hurry.
If you’ve been prescient and have acquired long-term care insurance coverage, the payouts can provide a measure of relief, but benefits are typically capped under the terms of the policy. Where else can you turn? If you qualify, you may be eligible for Medicaid benefits, but you generally have to reduce your savings to near-poverty levels. This common scenario has spawned the concept of “Medicaid planning.”
Basics Medicaid Planning
To begin this discussion, it’s important to distinguish between Medicare and Medicaid, because the two are often confused. Medicare, which is a federal program and essentially provides health insurance to retirees, covers up to 100 days of “skilled nursing” care per event. However, the definition of “skilled nursing” and the other requirements are strict, so few nursing home residents ever receive the full 100 days of coverage. As a result, Medicare covers only a fraction of the nursing home costs incurred around the country.
On the other hand, Medicaid is often used to pick up the slack where long term care insurance and other programs leave off.
Medicaid is the overall name for the separate state public medical systems (including Puerto Rico) that provide free or low-cost medical and long-term nursing home care for poor, indigent, and qualifying mothers and infants.
The federal government provides substantial subsidies to the states under the auspices of Medicaid, but each state has flexibility to set their own eligibility criteria. Therefore, the requirements may vary widely from state to state.
In addition, both the individual states and the federal government continue to tinker with the rules, further complicating matters. The last set of significant changes on the federal level were included in the Deficit Reduction Act of 2005, which revised the requirements relating to asset transfers by nursing home residents.
Medicaid funding in each state is generally very limited, though, and each state has strict requirements for eligibility. While specifics vary by state, eligibility criteria generally centers around two basic tests — assets and income.
While the very poor and very wealthy tend to have few problems accessing care, things are much trickier for lower-income families whose incomes and assets are not low enough to qualify. A severe and expensive medical event or a need for long-term care can be a devastating financial blow to uninsured families and seniors.
For example, a number of states have “relatives’ liability” or “filial support” laws that require adult children to pay bills for impoverished parents. While this is unusual, it may become more common in the future, as nursing homes and states look for more revenue in the face of rising numbers of baby boomer patients.
Medicaid planning is the practice of preserving a family members’ assets and working to ensure that they can legitimately qualify for as much assistance as possible.
When properly done, Medicaid planning does not involve hiding assets to qualify for assistance. Instead, it helps families position and spend down assets in a way that legally preserves their eligibility for benefits.
The traditional strategy is simple enough. By “spending down” your assets, you can bring yourself below the state threshold needed to qualify for Medicaid assistance. For instance, you might pre-pay funeral expenses for yourself and other family members or pay for more care at home. The funds are then removed from the calculation of assets for Medicaid purposes.
The exact amount of money an individual is allowed to have before qualifying for Medicaid depends on the state and the person’s marital status.
Years ago, some forward-thinking senior citizens gave away large sums of money and/or appreciated property to younger relatives as part of an overall spend-down strategy. But current law generally hinders this technique. Under the Deficit Reduction Act of 2005, state Medicaid administrators will “look back” for 60 months to count transfers as available resources for nursing home care.
Previously, the look-back period was only 36 months, although the 60-month look-back period already applied to transfers to trusts. (The 36-month look-back period continues to apply to transfers made before February 8, 2006.)
As you might imagine, trusts often play a critical role in Medicaid planning. However, if you establish a revocable trust (one that may be changed or rescinded by the one who created it), the trust assets will count towards Medicaid eligibility. Thus, revocable trusts are not worthwhile in this area. If properly structured, however, an irrevocable trust where you give up control can be structured to remove the assets as an available resource. Note: These arrangements are extremely complex and numerous variations exist. Your attorney can explain the applicable rules in more detail.
Any strategy involving transfers of assets must take other factors into account. For example, once you hand over assets to your children, the property is theirs to keep and you can’t legally require them to use it to help pay for your expenses. Whatever your children’s intentions, they might encounter problems due to bankruptcy, divorce or lawsuit. Any of these events could jeopardize your savings. Also, funds that are legally owned by your adult children might affect the college financial aid available to your grandchildren.
For all these reasons, planning ahead for long-term care is important. This article is only a brief summary of several critical issues involved in Medicaid planning. The best approach is to arrange a consultation with an adviser experienced in this area.