Medicare, the federal health insurance program primarily for men and women 65 and over, pays doctor and hospital bills for many older Americans. However, it doesn’t cover everything. For example, long-term custodial care for help with the “activities of daily living,” such as bathing, dressing and eating, isn’t covered.
The Costs of Eldercare
Many older people will eventually need such care, as a result of physical or mental impairment, and they and their families will have to find a way to pay for it. Unfortunately, it is rarely cheap. In fact, it can quickly wipe out a person’s life savings. A semi-private room in a nursing home costs an average of $225 a day, or $6,844 a month, according to the latest estimates from the U.S. Department of Health and Human Services (HHS). A private room averages $253 a day, or $7,698 a month.
For people who don’t need the level of care that a nursing home provides, a one-bedroom unit in an assisted living community runs about $119 a day, or $3,628 a month. Home health aides, for people who are able to remain in their own homes but still need some assistance, charge about $20.50 an hour, HHS says. These are just averages, of course. In high-cost areas such as New York City, the bills can run much higher.
Privately purchased long-term care insurance is one way to handle some of these costs, though it can be expensive and is not for everyone. It’s also generally most cost-effective when purchased before age 60.
What About Medicaid?
Another solution is applying for Medicaid, a joint federal and state program. Though the specifics vary by state, Medicaid generally covers nursing home services as well as home- and community-based services for people who need assistance but not skilled nursing care. In most states Medicaid will also cover services that can help people remain in their homes, such as personal care, according to the U.S. Department of Health and Human Services. (For more, see Medicaid vs. Medicare and Medicaid vs. Long-Term Care Insurance.)
In order to qualify, an elderly person must have total “countable assets” under a certain amount, typically $2,000 for an individual and $3,000 for couples, although the amount varies widely by state. In New York, for example, the 2018 Medicaid eligibility level is $15,150 for individuals and $22,000 for couples. Countable assets include bank accounts, stocks and bonds, cash value of life insurance polices and, in some cases, retirement assets.
A home, if the person owns one, may be excluded, though home equity over a certain level can affect eligibility. Note, however, that once the home is no longer the person’s principal residence, it will be counted as a resource and can become subject to a Medicaid claim for reimbursement.
Traditionally, people often reached the eligibility threshold either by giving money to family members or through a spend down – paying for their own care until enough of their assets were depleted, which was often quickly. However, there are legal strategies that can help older people qualify for Medicaid without impoverishing themselves or their spouse. Though the rules are complex, some of the specifics vary by state and the services of a knowledgeable lawyer are essential, here are five key options to investigate.
Asset Protection Trusts
A properly established irrevocable trust can be one way to shelter assets where they will not affect Medicare eligibility. An irrevocable trust, which transfers assets to the control of a trustee, effectively removes them from the older person’s control. This is in contrast to a revocable trust, in which the person retains the right to change the arrangement. Revocable trusts, which are also referred to as revocable living trusts, have their uses, but qualifying for Medicaid isn’t one of them.
Another option, of course, would simply be to give the money to a responsible child or another relative. However, David A. Cutner, an elder law attorney with Lamson & Cutner, P.C., in New York City, says that route can be far riskier. Once the money is transferred, it legally belongs to the other person. So even if the person is totally trustworthy, events in their own life – a divorce, a business failure, a lawsuit, their death – could put that money in jeopardy. Creating a trust instead can avoid these risks.
Medicaid currently has a five-year “look back” period, so if someone transfers assets into a trust and enters a nursing home more than five years later, the money in the trust will not be counted toward Medicaid eligibility. However, if the money was transferred within the five-year look-back period, that will affect eligibility for a period of time.
Attorney Cutner offers an example using his state’s rules that here is slightly simplified: Suppose a person transfers $120,000 to an irrevocable trust and soon thereafter enters a nursing home and applies for Medicaid. Using Medicaid’s “regional rate” of $12,000 per month for nursing home care in that geographic region, the “penalty period” of ineligibility can be easily calculated: the $120,000 transfer divided by the regional rate of $12,000 equals a 10-month period of ineligibility. The penalty period starts when the person is in the nursing home, has applied for Medicaid and is “otherwise eligible” for benefits – that is, he or she has less than $15,150 in total resources. (Note that in New York the look-back period applies only to nursing homes and not to assisted living or home care; in other states, it may apply to all three.)
In most cases, the actual cost of nursing home care is higher than Medicaid’s regional rate. As a result, the out-of-pocket cost of nursing home care during the penalty period will be greater than the amount of the transfer that caused the penalty. That is where the next strategy comes in.
Private Annuities or Promissory Notes
If a person needs to apply for Medicaid before the five-year look-back period is up, it still may be possible to preserve a significant portion of their assets by using a properly drafted private annuity or promissory note that complies with federal law, Cutner says.
Suppose the person in the example above transferred $60,000 into a trust and used the remaining $60,000 to purchase a private annuity prepared by an elder law firm. The monthly annuity payments, along with the person’s Social Security and any other income, could be used to pay the nursing home bill for the five months that the person was now ineligible for Medicaid ($60,000 divided by $12,000). There would be no transfer penalty for the money used to purchase the annuity, under federal law, so it wouldn’t affect the person’s eligibility. Plus, the $60,000 in the trust would now be preserved.
The person could also have transferred that same remaining $60,000 to someone in return for a promissory note, with a similar $12,000 monthly payback period. As with a private annuity, such an agreement would need to be structured by an elder law attorney to make sure it met Medicaid requirements.
Using the annuity or promissory-note strategy, many people can protect from 40% to 50% of their assets, Cutner says. High-net-worth individuals, with, say, $1 million or more in assets, are unlikely to benefit. For example, for someone transferring $500,000 to a trust in a locale where the regional rate is $8,000, the penalty period would be greater than the look-back period and might be longer than the person’s nursing home stay.
States differ in how they treat income for Medicaid purposes. In general, a Medicaid recipient who is in a nursing home must turn over all of their income, except for a small monthly allowance, in order to defray the cost of care. If the person needs home care or lives in a continuing-care retirement community, the state may consider any income over a certain limit to be excess or surplus and require that it go toward the cost of care. In those instances, a pooled trust can be a way to protect some of that income.
With a pooled trust, the older person arranges for their excess income to be paid to a charitable organization. The person no longer has control over the money but can submit bills to the charity for payment. Someone who is still living at home might use it for food and utilities, for example. This allows the person to defray everyday living costs that might exceed Medicaid’s relatively low limits. Note that only about a limited number of states permit such trusts.
Personal Care Agreements
A lump sum paid to a caregiver for future services may not be considered a penalized transfer if it is structured correctly. That can serve a number of purposes. One is to reduce the size of the estate, so the person will be eligible for Medicaid. Another is to buy the older person some care beyond what Medicaid provides.
This kind of personal care agreement can also help ease the financial strain on a child or other relative who has given up work and sacrificed income in order to provide care. Often, Cutner says, it can help prevent family rifts when the burden of caregiving falls disproportionately on a particular child. Such an agreement can also be used with an agency that provides home care services.
Spousal Transfers and Spousal Refusal
A transfer of assets from one spouse to the other is not penalized under Medicaid, so a common move is for a spouse who needs to go into a nursing home to turn over their assets to their spouse. Even so, the spouse is still legally obligated to provide for the other spouse’s care, and their collective assets will be considered for Medicaid eligibility purposes. By signing a spousal refusal, however, the well spouse may be able to renounce that responsibility, making the other spouse immediately eligible for Medicaid.
Later, Medicaid can attempt to collect reimbursement from the spouse, though Cutner says that strategies are available that may lessen the impact. Even if Medicaid does collect, the couple is likely to benefit, because Medicaid’s reimbursement will be based on the discounted rate it pays nursing homes rather than on the private-payer rate the couple would otherwise have had to pay. This option may not be available in your state.
The Bottom Line
If seniors lack the funds to pay for the care they need when they become mentally or physically frail, investigate these ways to help pay the bills without impoverishing the individual or their spouse. Healthy seniors should use this information to plan ahead for care they might need in the future.