Will you need long-term care? Studies show that approximately 70% of people reaching age 65 will need some type of long-term care. The average duration of long-term care (including in-home care and institutional custodial care) is 2.2 years if you are male and 3.7 years if you are female. However, 20% of adults 65 years old now will need long-term care beyond five years.1 Average nursing home costs in North Carolina are $6950/month.2
Medicare does not cover long-term care. Medicare coverage for nursing home care is very limited — paying only for skilled nursing home care for 100 days after a three day hospital admission. It does not cover any custodial nursing home care or non-skilled home health care. It is difficult to qualify for limited “skilled care” benefits. All other types of facility care is considered “custodial” and, therefore, not covered by Medicare.
Medicaid can help cover long-term care costs, if you qualify. Unlike Medicare, Medicaid is a government program which will pay medical costs and long-term care costs. Medicaid is designed as a payor of last resort, however, and to qualify you must meet strict financial and other eligibility requirements. The rules governing Medicaid are complex and frequently change, requiring great care in the planning and application for benefits. A North Carolina resident applying for Medicaid in a nursing home can have only $2000.00 in total assets, plus certain exempt or “non-countable” assets. Income must be contributed toward the cost of care, and an individual in a nursing home is entitled to keep only a $30.00 per month allowance.
If the Medicaid applicant is married and enters a nursing home while the other spouse remains in the community, the “community spouse” may keep $25,284.00 (or one-half of a couple’s resources up to a maximum of $126,420.00) in assets, in addition to the home. The spouse in the nursing home is entitled to keep only a $30.00 per month allowance while the “community spouse” is allowed a minimum income of $2,057.50 per month, with adjustments for certain items.
Without proper planning, all assets and income above these levels must be spent on care or on non-countable items before Medicaid will begin to pay for long-term care. Although transferring countable assets to non-countable assets will help you qualify for Medicaid, some non-countable assets are subject to “estate recovery” under many circumstances — meaning Medicaid may recover all or a portion of the cost of your care from those assets upon your death. Only what is left, if anything, will pass to your heirs.
Can you give assets away in order to qualify? As you might expect, there are complicated rules concerning giving away assets. An applicant must provide detailed information disclosing all of their and their spouse’s financial transactions during the five years preceding their application. This is called the five-year “look-back period.” Transactions include any gifts or other transfers for less than fair value. Assets given away or exchanged for less than fair value will cause the applicant to be ineligible for “institutional” Medicaid for a certain number of months, called the “penalty period.” The greater the value of the assets given away, the longer the penalty period. There are some exceptions for transfers to a spouse or a disabled child and for certain transfers of the home to siblings or caretaker children. Significantly, the penalty period will not begin to run until the applicant meets three conditions: (1) he or she needs nursing home care; (2) he or she has $2000.00 or less in assets; and (3) he or she applies for Medicaid.
Should you plan ahead to qualify for Medicaid? Given the complexity of the Medicaid rules and individual preferences, concerns, health and financial circumstances, there is no one-size-fits-all Medicaid qualifying or asset protection plan. In addition, when Medicaid rules change, plans may need to change.
However, here are eight ideas to consider:
- Purchase a long-term care insurance policy to help you pay for long-term care during the five-year look-back period. In addition to helping you pay for long-term care, certain types of policies, called “Partnership for Long-Term Care qualified policies,” allow you to qualify for Medicaid under more favorable eligibility rules.
- If you are married, instead of leaving your solely-owned assets to your spouse outright, a testamentary trust with supplemental needs provisions can protect those assets for the benefit of your spouse without disqualifying them from Medicaid coverage in the event you die first.
- Assets held in a revocable trust you establish are countable assets if you or your spouse apply for Medicaid. However, certain types of irrevocable trusts (such as income-only trusts or Medicaid asset protection trusts) can protect the assets held by the trust after the expiration of any applicable penalty period imposed as a result of the transfer of property into the trust during the look-back period. Be mindful that income generated by assets held in an irrevocable income-only trust will be considered available to pay for the cost of long-term care.
- You could give a substantial portion of your assets to your children or other trusted individuals, keeping in mind the look-back period and its transfer penalties. However, such assets are then subject to unwanted, unplanned diminishment in the event your trusted person dies, divorces, has financial difficulty for any reason or, frankly, is not as trustworthy as you thought. Irrevocable trusts protect your assets better than simply giving them away, but outright gifts of some assets can be part of a good Medicaid qualifying plan under the right circumstances.
- There are tax consequences to giving assets away. Retirement assets will lose their tax-deferred status. Real property (e.g. houses and land) will be subject to higher capital gains taxes if given away during your lifetime rather than transferred at your death or placed in an irrevocable trust with carefully created provisions. Generally, it is advisable to hold onto all or most of your retirement assets until you or your spouse need long-term care, at which time you can engage in exigency planning.
- When nursing home care is imminent, exigency planning can protect a substantial portion of the applicant’s or couple’s assets. By gifting or transferring the right amount and type of assets into an appropriate irrevocable trust and structuring other asset transfers as an exchange for a secured interest, much like a loan, through the use of a promissory note, private annuity or Grantor Retained Annuity Trust (GRAT) to pay for expenses during the penalty period created by the gifts or transfers for less than fair value, assets can be channeled to a trust, or to children and grandchildren, while providing the applicant with sufficient income through the note or annuity payments to pay for their care until Medicaid is available at the end of the penalty period
- Create a durable power of attorney with special provisions that specifically allow your agent (or “attorney-in-fact”) to take all or many Medicaid planning steps for you (such as transferring assets, purchasing annuities and creating irrevocable trusts) in the event you become incapacitated and Medicaid planning or additional Medicaid planning would be beneficial.
- Seek competent advice from a qualified estate planning professional early – before you or your spouse become a resident in any type of facility or require assistance in the home. An ounce of education and planning is worth a pound of cure.
It is impossible to set out in this outline every planning opportunity. There are other steps you could take as part of a thoughtful, overall plan. Your and your spouse’s preferences, concerns, health and financial circumstances will affect your plan. If you would like to develop a plan, or if you simply want to begin a discussion that will help you think about your options, we will be glad to help you. Please call contact us through our website or call 919-435-3646 to schedule a consultation.
1. “How Much Care Will You Need?” U. S. Department of Health and Human Services, longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html.
2. “Genworth Cost of Care Survey 2018: Median Cost Data Tables,” Genworth Financial, https://pro.genworth.com/riiproweb/productinfo/pdf/282102.pdf.
3. Keep in mind that “memory care” for persons with dementia and “assisted living” are not within the definition of “long-term care” in a nursing home or skilled nursing facility and that different Medicaid rules apply to applicants in need of such care.