The Deficit Reduction Act of 2005 with its five-year look-back put a big dent in Medicaid planning for long-term care. But there are still plenty of options for preserving income and retaining assets.
It can happen to anyone. A lifetime of savings can be wiped out by a catastrophic illness or an extended stay in a nursing home. With the national average for nursing home care around $80,000 per year for a semi-private room and $90,000 for a private room, it's easy to see how a family's savings can quickly disappear. Once assets are depleted, Medicaid can step in to cover the health-care costs.
Medicaid is a joint federal and state program to provide health care for people with very low income and is the largest payer of nursing home costs in the U.S. Eligibility requirements vary from state to state, but federal standards and guidelines must be followed, and both medical and financial criteria must be met.
The financial criteria are set by the states, but in general, the maximum monthly income of the institutionalized person must be less than $2,094 to meet the income test, and countable assets cannot exceed $2,000. Countable resources include cash or property that a person owns or has the authority and power to convert to cash in order to pay bills.
The planning opportunities come into play with exempt resources and the spousal share of assets. Each state compiles a list of exempt assets, which typically includes:
> The home and contiguous property, if married. If not married, there is a limit to the exemption based on the amount of equity in the home and length of stay in the nursing home.
> One automobile, regardless of value.
> Prepaid burial plots and contracts.
> Term life insurance.
What About the Spouse?
The spouse who is not institutionalized is referred to as the "community spouse" and is allowed sufficient resources to prevent them from poverty, according to each state's definition. When the Medicaid application is made, the assets of both spouses are counted and then allocated. The community spouse is allowed half the value of the countable resources with certain restrictions. The federal guideline allows the community spouse to retain a minimum of $23,184 and a maximum of $115,920.
If the community spouse doesn't have enough income to live on, then he or she is allowed to take some or all of the institutionalized spouse's income to bring their monthly income up to a maximum of $2,898.
Many strategies require advance planning of up to five years in order to be implemented effectively, so it is essential to start early when considering Medicaid planning.
Gifting is probably the best-known method for preserving assets, and many people (and especially their children) believe that they should transfer most of their wealth in order to avoid paying for their long-term health care. But this strategy has several serious drawbacks:
> The value of assets that are transferred for less than market value in the five years prior to institutionalization are used to calculate a penalty period. The sum of the gifts within the 60-month look-back period are divided by the average cost of private-pay nursing home care in the patient's locality to determine the number of months for which Medicaid will not pay for long-term care services. So if $70,000 was gifted and the average monthly cost was $7,000, then the donor would not be eligible for Medicaid assistance for 10 months after meeting the other medical and financial criteria. Some states allow a return of the transferred assets to avoid or shorten the penalty.
> Most people will not know when to start the five-year clock prior to their need for long-term care.
> It's a gift! The transfer is irrevocable. Once the assets are given away, the donor's use of the gift is at the whim of the recipient, and a lot of things can change in five years. Even if the use of funds goes as planned, it is quite possible that the donor will be uncomfortable or resent having to ask for money for basic needs.
The Deficit Reduction Act of 2005 significantly tightened restrictions on Medicaid planning, but there are still many strategies that can be used to "spend down" assets to qualify for Medicaid but still ensure the client's continuity of care, improve the client's quality of life, and preserve assets. These include:
> Purchase long-term care insurance before the need arises.
> Purchase long-term care insurance for the community spouse if his/her wife/husband is already institutionalized.
> Pay up to six months of private-pay nursing home expenses in advance.
> Purchase pre-paid burial plots or contracts.
> Get a reverse mortgage on the home--the proceeds are excluded resources.
> Pay off the home mortgage.
> Renovate the home.
> Pay off debts.
> Transfer the home to a "caretaker child" who lived in the house at least two years prior to institutionalization and who provided care during that time in order to avoid a nursing home stay.
> Purchase a Medicaid-compliant annuity for the surviving spouse. The criteria are rigid, and Medicaid is the remainder beneficiary.
> Set up an irrevocable trust. The five-year look-back applies.
> Purchase EE or I US Savings Bonds--up to $10,000 per year and they must hold for at least one year.
> Divorce--unthinkable for some and a planning opportunity for others.
> Pay attorney fees for Medicaid planning.
> Start in private pay and transition to Medicaid to have control over the selection of the institution and quality of care.
> Move to a state with more flexible Medicaid rules. Individuals suffering from dementia or Alzheimer's may find that some states are more willing than others to offer aid.
> Gifting within reason and in conjunction with solid estate planning.
Medicaid planning is not a do-it-yourself proposition. Now, more than ever, a thorough knowledge of the rules and how those rules are applied is required. An elder law specialist can identify and interpret state guidelines, including those for income, resources, and countable vs. exempt assets. They can help find facilities that start as private pay but can transition to Medicaid if necessary. They can navigate the complex rules for trusts and annuities, and they can develop a cost-effective strategy that is carefully planned and implemented.
Cause for Concern
Proper planning and expert advice can prevent legal problems for the children of parents needing long-term care. Nursing homes have become desperate to recover the costs of long-term care and are dusting off filial responsibility laws that had rarely been enforced until recently.
In May 2012, a Pennsylvania appeals court ruled that a son was responsible for his mother's $93,000 nursing home bill. It was ruled that the nursing home did not have to look to other sources of payment, such as her spouse, other adult children, and Medicaid. The state Supreme Court refused to hear the case, making this a final judgment.
It's not just the nursing homes that will go after the children. Some states impose hefty fines if children fail to file Medicaid applications on behalf of their indigent parents. And some states will put a lien on property while the Medicaid recipient is alive or seek reimbursement from the estate after death.
The following 29 states have laws making adult children financially responsible for their parents if the parents can't afford to pay for their own care: Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, and West Virginia.
Who would have thought that you could incur a financial obligation just by being born?
The Advisor's Role
Some clients may feel strongly that if you have the money, you should pay your own way rather than have the taxpayer pick up the bill. Others may believe that they have already paid their fair share of taxes to help others and that they should be allowed to shelter their countable assets to preserve them for heirs or provide for a spouse.
No matter which camp they fall in, we all know someone, whether clients or their parents, who will need help stretching their assets to meet long-term care needs. Expand your centers of influence to include some outstanding elder law attorneys and help your clients to understand that the best planning is done before the crisis comes.