You may have saved diligently for retirement and managed your money well, but in the end, long-term care costs can derail your plans and quickly exhaust your savings and other assets. According to LongTermCare.gov, average costs for 2010 were $6,235 and $6,965 per month for semi-private and private rooms in nursing homes, respectively. For how many years can you afford to pay in the $75,000-$85,000 range for your care?
A one-bedroom assisted living facility is a bit cheaper, at $3,293 per month on average (2010 values), approaching $40,000 per year. Given that long-term care averages 2.2 years for men and 3.7 years for women, the odds are that you have insufficient resources to meet your long-term care needs.
Long-term care insurance is an option, but it is expensive and has limitations. Fortunately, Medicaid is there to pick up the remainder of long-term care costs – but to become eligible for Medicaid, you can only possess a limited amount of resources considered “countable assets.”
States set their own limits, but a general guideline is around $2,000-$3,000 in assets such as bank accounts, CDs, stocks, bonds, or the cash value of any life insurance policies. Homes are typically excluded although Medicaid eligibility is affected at higher home equity values. This leaves many seniors paying for their own care until their assets are depleted enough to go on Medicaid.
Medicaid has tightened up on previous plans to shelter assets and keep Medicaid eligibility for long-term care, but Medicaid Asset Protection Trusts are still available for this purpose. To execute them properly, you need planning, foresight and a good eldercare attorney well versed in your state laws.
Medicaid Asset Protection Trusts are irrevocable trusts that transfer control of a chosen amount of your assets to a trustee. As you no longer own or control the assets, they are no longer “countable assets” for Medicaid purposes. However, to prevent people from simply hiding or dumping assets solely to go on Medicaid, a “look-back” period was established to make sure that you received fair market value for your assets. The current look-back period is five years.
An eligibility penalty is imposed on assets transferred without receiving fair market value in return (as is the case with trusts or gifts). Your eligibility is delayed by the factor of long-term care costs in your state. For example, transferring $60,000 in a state with a $6,000 average long-term care cost would result in 10 months worth of ineligibility for Medicaid – the amount of care you could have paid for with that money.
The penalty starts from when you apply for Medicaid, not from when you make the transfer. Five years after the transfer, there is no penalty, and the trust funds do not count against Medicaid eligibility. However, if you require nursing home care at any point within a five-year period after such a transfer, you are ineligible for Medicaid and responsible for the costs until eligibility is restored.
You can add a layer of protection by purchasing a private annuity to cover the gap. Annuities are exempt from the transfer rule if constructed correctly, thus annuity payments would offset some of the costs during any penalty period.
With all the restrictions, why bother to do this? Because if constructed properly, the use of a trust allows the principal assets in the trust to pass through to your heirs instead of being absorbed into your long-term care expenses. Using a trust will also reduce future taxes on your heirs by upgrading the cost basis of the assets.
Meanwhile, the interest that the trust generates can go toward your living expenses or toward a long-term-care facility if you do require care.
What if your Social Security check will put you over the state limit for Medicaid eligibility by itself? If your state allows it, you can set up an income trust. In essence, most of the income that goes into the trust goes right back out toward your long-term care costs (there is no shielding of assets), but you retain Medicaid eligibility that will cover other costs.
Medicaid asset protection trusts are a complex and evolving field. There are myriad state laws involved and frequently changing Medicaid rules. It is critical that you consult a qualified and experienced eldercare attorney to advise you in this area and craft a suitable trust for your needs. Do not base your asset protection strategy solely on this (or any other) single article.