Long-term care involves a loss of personal autonomy and comes at a tremendous financial price. Proper planning can help your family prepare for the financial toll and protect assets for future generations.
Long-term care can be very expensive, especially around-the-clock nursing home care. Most people end up paying for nursing home care out of their savings until they run out, at which point they can qualify for Medicaid to pick up the cost.
Qualifying for Medicaid to Cover Long-Term Care Expenses
Medicaid rules require that recipients have no more than $2,000 in countable assets (the figure may be somewhat higher in some states) and limited income. Any excess assets need to be spent down before you can qualify for Medicaid. In addition, in order to be eligible for Medicaid, you can't have recently transferred assets. If you transfer assets within five years of applying for Medicaid, you may be subject to a penalty period during which you can't receive benefits. After you die, Medicaid also has the right to recover health care costs from your estate, which usually means taking your home.
Careful planning in advance can help protect your estate for your spouse or children. If you make a plan before you need long-term care, you may have the luxury of distributing or protecting your assets in advance. This way, when you do need long-term care, you will quickly qualify for Medicaid benefits.
Some Estate Planning Tools Used to Prepare for Medicaid
- Trusts. One of the most important estate planning tools you can use is an "irrevocable" trust — a trust that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the "grantor") for life, and the principal cannot be applied to benefit you or your spouse. At your death, the principal is paid to your heirs. This way, the funds in the trust are protected, and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee can't pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home. And to avoid Medicaid’s look-back period, the trust must be funded at least five years before applying for benefits. Learn more about using a trust for Medicaid planning.
- Annuities. Annuities are another tool married couples can use to prepare for Medicaid. An immediate annuity, in its simplest form, is a contract with an insurance company under which the policyholder pays a certain lump sum of money to the insurer, and the insurer sends the policyholder a monthly check for the rest of their life. In most states, the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid. It is an investment purchase instead. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the spouse who is not in the nursing home, it's considered non-countable. For single individuals, annuities are less useful, but if you transfer assets, you may be able to use an annuity to pay for long-term care during a Medicaid penalty period resulting from a transfer.
- A Life Estate. After a Medicaid recipient dies, the state must attempt to recoup the costs of care from their estate. This is called estate recovery. For most Medicaid recipients, their house is the only asset available, but there are steps you can take to protect your home. Putting your house in a trust can be a good option, but once a house is placed in an irrevocable trust, you can't remove it. Another option is a life estate, which is a form of joint ownership of property between two or more people. They each have an ownership interest in the property but for different periods of time. The person holding the life estate possesses the property currently and for the rest of their life. The other owner has a current ownership interest but can't take possession until the end of the life estate, which occurs at the death of the life estate holder.
