While Medicaid pays for 59% of long-term elder care in the US (its largest category of spending by far), when the program was created it was intended as a “payer of last resort” — a form of insurance that takes over for poor seniors or, as is often the case, senior citizens made poor by their long-term care. With the average cost of a nursing home in New York reaching $128,000 per year, twice the cost of college, Medicaid is an inevitable fact of life for even successful retirees with what seemed like perfect estate planning.
Due to its need-based mandate, Medicaid has notoriously stringent criteria for eligibility, including hard limits on income (zero – any incoming payments must go directly to Medicaid), assets (no more than $14,200 in cash or investments), and gifts, both given and received. These rules became stricter after the Deficit Reduction Act of 2006 (which also made bankruptcy a more difficult, painful process) and will likely be tightened again in the next few years through the currently proposed health care reform.
One major change that caused losses of billions of dollars thought to be safe was the restriction on annuities to the lifetime of the annuitant (the originator of the asset), preventing them from being a way to safeguard an estate, since any remaining balance would now go directly to the government. Even more vexing are the rules surrounding the newly expanded lookback period, a span of up to five years before applying for Medicaid where all spending is scrutinized with the theory that any unnecessary spending in those years should have been directed toward future nursing-home care.
It’s never too early to think about Medicaid. It may be possible to “pre-execute” a substantial portion of the estate at a much earlier age than you might expect — possibly as soon as 61. Using trusts and annuities, you can move assets into your children’s names, where Medicaid can’t look for them. The downside here is that these “gifts” are taxable at a rate even higher than ordinary income… and are taxable twice if they need to give you back some of it for additional expenses you didn’t foresee. Also, you take the risk that your family members will spend the money as if it were an inheritance, and it won’t be available if or when you need it. And if you end up in long-term care sooner than expected, they will be obligated to pay back more than they received — the entire pre-tax value of the gift.
Another way to maximize the remaining estate is to move, counterintuitively, to a more expensive property. While many seniors downsize with the intention of saving money, upsizing has its advantages too. Medicaid allows you to keep your residence up to a set limit of $543,000 ($814,000 in and near some major cities) as long as you owned the home for at least five years, and it is the final place you live before the assisted-living facility. And as long as you don’t sell the house, it, or the proceeds from its sale, becomes part of the estate.
If you are married, assets for the exclusive benefit of your spouse are also exempt. This one won’t help your heirs, but it will ensure that your spouse is taken care of during and after your illness. Assets are generally considered to be shared between married couples, and count against your eligibility, however, it’s possible to create a special type of “Medicaid annuity” and protect assets that otherwise would have had to go toward your own care. These annuities are restricted to the actuarial life expectancy of the spouse not in the nursing home, and in case of an early death do NOT become part of the estate, but rather are forfeited to the Medicaid.
While these options become more and more restrictive the longer you wait, it’s possible to save more than one might initially expect. Make sure you start planning early, and consult a financial advisor specializing in Medicaid and long-term care to protect the funds for your care and your inheritance!