As we age, we have to face an unpleasant reality of life – we are likely to need long-term care services before we die.
“Long- term care” means the type of care you need if you have a prolonged physical illness, disability or severe cognitive impairment (such as Alzheimer’s disease) that keeps you from living independently. As a result, you need assistance carrying out basic self-care tasks, including feeding, bathing, dressing, personal care, and transferring. Long-term care is sometimes referred to as “long-term services and supports.”
A majority of seniors will receive such help sometime during their remaining lives —usually at home, but often in a nursing home. Long-term care needs will last for an average of 2.5 years for women and 1.5 years for men. 14% of us will need long-term care assistance for five years or more.
The costs can be overwhelming; the burdens on our loved ones enormous.
An elder law attorney can help ease those costs and burdens. This article will discuss three techniques that elder law attorneys use to help families protect themselves against the financial cost of long-term care once the need for that care has arisen. These strategies are just part of the planning arsenal that is available. They can be used in a time of crisis. But, of course, it is best to plan early, rather than wait for a crisis to happen.
The planning ideas discussed below focus on qualifying for the government’s Medicaid program to help protect the financial security of an individual (known as “the community spouse”) who is married to a nursing home resident. But these techniques can be adapted for unmarried individuals and for those persons, married and unmarried, who are receiving care at home.
WHO PAYS FOR LONG-TERM CARE?
The average cost of nursing home care in Pennsylvania is now over $125,000 a year (in 2019). Not many Pennsylvanians can afford to pay that kind of cost for long. Privately paying for your care involves spending your savings and liquidating certain other assets to pay the nursing home or in-home caregivers each month. At an average cost of over $10,000.00 a month for care in a Pennsylvania nursing home the assets that you have accumulated during your life can be quickly depleted.
When a married couple is facing a spouse in a nursing home, to protect the financial security of the “community spouse” (i.e. the spouse not requiring long-term care,), at least some of that cost may be shifted onto a third party as soon as possible. Potential third-party payers include Medicare, private insurance, and Medicaid.
Most seniors have Medicare financed coverage as their primary payer of health care costs. But Medicare does not pay for long-term stays in a nursing facility. At a maximum, and only after meeting certain qualifications, Medicare may pay up to 100 days in a nursing home.
Another possible payment source is insurance. While standard health insurance doesn’t cover nursing home costs, healthy individuals can buy special long-term care insurance that does. But few seniors have this kind of coverage. It’s expensive and underwriting standards can be difficult to meet. And premiums have historically continued to increase. As a result, few seniors are covered by long term care insurance.
USING ASSETS TO PAY OFF DEBTS AND EXPENSES
By using at-risk assets to pay bills prior to applying for Medicaid (but after the institutionalization date to a skilled nursing facility, also known as the “snapshot date”) the community spouse can reduce the demands on the assets he or she needs to spend on care under the Medicaid spousal impoverishment rules. For example, a couple may elect to pay off existing debts and/or to prepay real estate taxes, insurance, or other large bills.
Example: John and Marian Jones have a home and $100,000.00 of countable savings when John enters a nursing home for a long-term stay. Under Medicaid spousal impoverishment rules, Marian is allowed to keep $50,000.00 as her protected allowance and John is permitted to retain $2,400.00. They have $47,600.00 in excess resources that prevent John from being eligible for Medicaid.
After John’s admission to the nursing home, Marian spends the $47,600.00 excess by paying off the mortgage on the couple’s home, some credit card debt, and by making an advance payment of real estate taxes. Because Marian now has only $50,000.00, and John has only $2,400.00 left, John is eligible for Medicaid.
BUYING ASSETS THAT ARE NOT COUNTED BY MEDICAID
Medicaid eligibility rules do not count certain assets such as a home, one vehicle, and personal effects. Therefore, in appropriate cases a community spouse might take money from countable savings to buy a more expensive home; repair or improve an existing home; or buy a new car, new household furnishings, or personal effects. Medicaid rules do not restrict spending countable assets on non-countable ones of equivalent value. Money spent on non-countable assets needed for the community spouse’s use can accelerate Medicaid qualification.
Additionally, irrevocable funeral and burial arrangements can be pre-planned and funded for the institutionalized spouse and/or the community spouse. Medicaid does not count these irrevocable funeral assets, provided that they fall under the limits set forth each year.
Example: In the John and Marian example above, after John’s admission to the nursing home, Marian could spend the $47,600.00 excess on a new furnace for their home, a new car, and irrevocable funeral and burial expenses. Because of this allowable spending John is now financially eligible for Medicaid.
CONVERTING COUNTABLE ASSETS TO INCOME
Some strategies are designed to convert excess assets into income for use by the community spouse. In order to avoid a Medicaid penalty, the community spouse must receive something of equal value in exchange for the converted assets.
A conversion strategy that is frequently used involves annuities. Annuities are contractual arrangements in which an individual pays a lump sum to receive a future stream of income in return. They are offered in a variety of forms by commercial financial entities, and can involve poorly understood consequences and costs to the consumer.
Most annuities are inappropriate vehicles for Medicaid planning. But there are particular annuities that conform to the specific requirements of Medicaid law that can be used to protect all of a couple’s excess resources for the community spouse. Although savings are immediately and substantially reduced, the community spouse’s income is increased by a more modest but recurring amount. The at-home spouse can either spend that income or reinvest it, effectively recouping all of the assets used to purchase the annuity.
In the typical scenario, after the institutionalized spouse enters the facility, the community spouse, acting under the guidance of an elder law attorney, liquidates the couple’s excess resources and uses the funds to purchase an irrevocable, non-assignable, non-transferable annuity that meets all of the requirements of the Deficit Reduction Act of 2005. If done correctly, there is no transfer penalty, and, since the annuity payments are payable to the community spouse, the payments received are income to the community spouse and do not impact the Medicaid eligibility determination.
Example: Let’s go back to John and Marian. What if John and Marian do not have expenses to pay, already have a brand-new vehicle before the nursing home admission, their house was recently updated, and they paid for their final expenses years ago? There is another choice rather than spending the $47,600.00 on care costs. Annuity planning may be appropriate for John and Marian.
Marian could purchase a Medicaid Compliant annuity that satisfies all of the requirements of the law with the excess $47,600.00. The annuity will pay her equal installments of income each month for a determined period. For example, she could receive payments for 5 years of approximately $793.33 a month. These funds would be saved from the cost of her husband’s care and allow her to maintain her standard of living in the community.
Medicaid does have a 5-year look-back for gifts, meaning gifts made within 5 years of applying for benefits will create a penalty during which time you are not able to receive Medicaid benefits. However, there is no penalty for gifts of assets between spouses.
Additionally, with a single individual, a variation of an annuity plan that includes gifts to other family members can be completed if an individual has enough assets to pay through a penalty for those gifts. This gift annuity planning is highly specialized and should only be implemented under the supervision of an experienced elder law attorney.
Don’t try the annuity conversion strategy or the other techniques mentioned in this article without expert help from an elder law attorney who knows the rules in the Medicaid applicant’s state inside and out.
The Certified Elder Law Attorneys at Marshall, Parker and Weber understand these planning techniques. In fact, Attorney Matt Parker was the attorney on the precedential case of James v. Richmond in 2005 that HELPED established the use of Medicaid annuities. It’s easy to make a catastrophic mistake by buying the wrong annuity or an annuity that does not contain required special Medicaid provisions or which was purchased at the wrong time.
Importantly, there is different planning that can be done before a time of crisis to help protect assets from the cost of long-term care. This planning can include irrevocable Medicaid asset protection trusts. It also can include a financial power of attorney that can allow someone else (your “Agent”) to step into your shoes and complete any of the planning discussed in this article on your behalf.
Medicaid qualification rules vary from state to state and change over time. This article is based on Medicaid rules in effect in Pennsylvania as of October 2019. Be sure to consult with a Medicaid experienced lawyer in the state where the Medicaid applicant resides to find out about the rules in that state and to help you get the planning assistance you need.
This article lists just a few of the planning strategies available to you under the Medicaid statute and regulations. Each family situation is different and the best solutions for you will depend on your unique circumstances. Consult with an elder law attorney who is experienced in Medicaid issues.
If the person in need of care resides in Pennsylvania, Marshall, Parker and Weber can help. We have been helping families get through the long-term-care maze for over 35 years.
(This is a 2019 update of an article that previously appeared on this blog.)