How to Protect Your Assets from Nursing Home Costs
If you want to prevent your assets from being used to pay for nursing care costs, you must plan ahead – way ahead. Should your resources permit you, purchasing long-term care insurance is one option. The problem is that it is the most expensive way to make sure your assets will not end up financing your stay in a long-term care facility. As with any type of insurance, the earlier you have it in place. You’ll typically need to start paying for it several years, even decades, before you actually need it. The earlier you get it the less expensive the monthly payments will be.
Creating a Medicaid Trust, is a less expensive option. A Medicaid Trust, sometimes erroneously called a Medicare Trust, is an irrevocable trust that holds the assets of the future nursing home patient. It must be properly worded and have an independent trustee. To make sure Medicaid will not disallow any assets you include in the trust, you must set it up and transfer assets into it at least five years prior to entering a nursing home or applying for long-term care. This is called a five-year lookback period.
Some people make the big mistake of giving assets away to family members instead of creating a trust. One big problem with this scenario is that it can create a tremendous gift tax bill. If the same family member received the assets after the parent or grandparent died, there would likely be no tax bill unless the assets were in the multi-millions. Other, perhaps larger problems arise when the child or grandchild who has received the house, car and bank account is sued, runs into a tax problem, dies, gets divorced or incurs a huge hospital bill. Grandma’s home, automobile and accounts could be confiscated. A much better option is the Medicaid trust.
How Medicaid Trusts Work
Assets are placed into an irrevocable Medicaid trust. The future Medicaid recipient can use the assets as before. However, since the assets are held by the trust instead of the recipient, the government does not count those assets for qualification purposes. So, grandma can still live in the house, use the furniture and drive the car held by the trust. However, grandma will not hear “your assets are too valuable to qualify for the program,” because the assets will not be in grandma’s name. In addition, there generally are provisions in the trust so that her kids and grandkids, etc. can be given the assets in the trust after her passing.
The Perils of Long-term Care Insurance
As people live longer, paying for long-term care insurance becomes more expensive. In the United States, less than 8 percent have long-term care insurance. The prohibitive cost and varying coverage restrictions are often enough to deter the average American from purchasing long-term care insurance. Additionally, many people are in denial about needing long-term care when they get older. That’s something that happens to ‘other people.’ The truth, however, is quite grim. According to data released by the Center for Retirement Research, the odds that older Americans will need some type of long-term care or assistance are up to 58 percent for women and 44 percent for men.
The cost for a nursing home stay or home health care vary greatly from one state to the next. But older Americans can expect to pay tens of thousands of dollars each year for long-term care no matter where in the country they live. This can come out of their own pockets, Medicaid, or paid for by a long-term insurance policy. The cost is expected to keep getting higher with each passing year. In light of this scenario, purchasing long-term care insurance several years before you reasonably expect to need adds up to a very expensive option.
There are ways to mitigate the cost of long-term care insurance and protect more of your assets from nursing home costs. For example, you could buy a plan with a limited coverage and pay for what the plan does not cover from your savings. Or, you can opt for a reduced daily benefit or even limit the number of years benefits are paid. If you can afford to do so well in advance of needing long-term care (ideally, when you’re young and in good health), purchasing long-term care insurance is sensible and prudent. It is a very expensive way to ensure that your assets will not be used to pay for long-term care, should you end up needing it when you’re older.
There is always the possibility that you may not ever get to collect on a long-term care insurance policy because you end up not needing long-term care (good for you!). The industry does offer options, such as life insurance policies that come with long-term care benefits. If you pass away without using the long-term care benefits, your heirs receive the death benefit just as they would with a typical life insurance policy. However, if you need to avail of the long-term care benefits, you can use the death benefits to pay for whatever long-term care you need. If there is anything left after you pass away, that goes to your heirs as well.
Long-Term Care from Medicaid
Majority of Americans will end up relying on Medicaid for their long-term care. However, before you qualify for long-term care from Medicaid, your existing financial resources must meet the set threshold. The problem is that this threshold level is extremely low. Some states require Medicaid recipients to have no more than $2,000 in savings and less than $50 a month in income in order to qualify. What happens to Americans who need long-term care who cannot afford long-term insurance but who do have certain assets that puts them above the Medicaid threshold?
It often happens that elderly Americans ‘spend down’ their financial resources so they can meet the Medicaid threshold and qualify for long-term care. This means they pay for long-term care out of their own resources until such a time when they can qualify for Medicaid. Spending down your assets and financial resources to qualify for Medicaid long-term care means there’s nothing you can leave behind for your children and spouse when you die, with the possible exception of your house. But this is only for as long as the value of your property meets the maximum allowable value established by the state where you live. If your house is assessed to be above this maximum allowable value, you could still lose it in some states.
Additionally, Medicaid has a five-year look-back window regarding assets that you transfer to a trust or ‘sell’ (typically below market value) to your family members and/or friends before you apply for long-term care. Transfers of certain assets may be disallowed if they are made less than five years before you enter a nursing care or assisted living facility. If they are disallowed, that means you still own them and therefore, you have to spend them down before you can qualify for Medicaid long-term assistance.
Irrevocable Medicaid Trust
Understandably, you may have certain assets that you wish to leave behind for your children or spouse when you die. One way to avoid spending down your assets so you can qualify for Medicaid is to create an irrevocable Medicaid trust. The assets you use to fund this trust will not be counted for Medicaid eligibility, as long as neither you (the person applying for Medicaid) nor your spouse has access to the principal or is named as the trustee.
Set up properly, an irrevocable Medicaid trust protects your assets from a Medicaid spend down and allows you to qualify for long-term care at the same time. It also means your assets can pass down to your spouse and children when you die, according to the terms of the trust. Keep in mind however, that you have to establish this trust and transfer assets to it at least five years before you apply for Medicaid long-term care benefits. If you do not meet this five-year minimum, Medicaid may judge your transfer and the trust itself as void, and so will count your assets in determining your eligibility (or ineligibility) for long-term care.
The goal of a Medicaid Trust is to dissociate you from your assets so they will not be considered in determining your eligibility for long-term care from Medicaid. In this respect, almost any type of domestic or offshore irrevocable trust will basically accomplish the same goal as a Medicaid Trust. However, keep in mind that these asset protection vehicles may fall under a completely separate set of rules and regulations. It’s best to do your homework, consult with a trusted professional, and to do both at the earliest possible time you can.
According to the U.S. Department of Health and Human Services, more than 70 percent of Americans over the age of 65 will need some type of long term care assistance at some point in their lives. Forty percent of Americans who reach 65 will likely enter a nursing home facility, which is one type of long-term care (there are others). For 20 percent of these elderly Americans, the average stay in a nursing home typically lasts for five years. While most Americans think long-term care is something that others will need (and not them), these grim statistics clearly say otherwise.
No reader is ever advised to purposely attempt to defraud Medicaid by hiding assets from nursing home costs through illegal means. However, protecting your assets from Medicaid through trusts is a perfectly legal and, in fact, a financially shrewd maneuver.
Purchasing long-term care insurance several years before you may realistically expect to benefit from it is an extremely expensive way to protect your assets from a Medicaid spend down. Long-term care insurance is often extremely costly. The industry also offers wealth-sapping hybrid options that combine a life insurance policy with long-term care benefits. If you end up needing long-term care, you can draw down the death benefits to pay for nursing home costs or extended home care assistance. If you don’t end up needing long-term care, your heirs receive death benefits when you die, just as they would with a regular life insurance policy.
Setting up a Medicaid Trust is a much less expensive option. Keep in mind, to make sure Medicaid will not disallow any assets you include in the trust, you must set it up at least five years prior to entering a nursing home or applying for long-term care.
No one wants to think of ever needing long-term care, but the truth is, this happens much more often and to far more people than we realize or care to admit. Taking the steps to make sure your assets are legally safeguarded from nursing care costs means you have a higher chance of being eligible for Medicaid long-term care benefits. It also means, you get to leave something behind for the people you care about the most.